Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
Principles of Microeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (12th Edition)
12th Edition
ISBN: 9780134421315
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 11.A, Problem 3P
To determine

Justifying the statement on the present discount value.

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Jack’s Lock and Key are considering remodeling. It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year, $2,500 the second year, $1,500 the third year, and have no effect after then. If the interest rate is 5%, should Jack’s remodel? Defend your answer by showing your work.
Imagine that at age 25 you have the choice to begin to deposit $8000 per year into your 401k. You will retire at 65. The 401k grows at (an average of) 6% per year (it compounds yearly). Say that your utility for money is just the value of money: u(x) = x. Say that you have a “standard” discount rate of 0.95, which choice would an individual make? What is the implied break-even \beta if you have quasi-hyperbolic preferences?
Suppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent?
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