Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Chapter 17, Problem 17.2P
To determine
To find:Fraction of income to be saved for retirement.
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Suppose you are considering whether to purchase a house off of Lake Erie for $400,000. You expect the total costs of maintaining the property (utilities, repairs, etc.) to equal $15,000/year, and that you would be able to generate $35,000/year in revenue if you were to put the house on the short term rental market.
Suppose you are deciding between purchasing the home or whether to invest $400,000 in an interest-bearing account. If your objective is to maximize your own net income, what would the interest rate have to equal for you to invest in the interest-bearing account?
Can you help me just figure out how to set this up? I get that we need the investment to equal 20k but not sure on how to figure out interest rates.
Suppose you are considering whether to purchase a house off of Lake Erie for $400,000. You expect the total costs of maintaining the property (utilities, repairs, etc.) to equal $15,000/year, and that you would be able to generate $35,000/year in revenue if you were to put the house on the short term rental market.
Suppose you are deciding between purchasing the home or whether to invest $400,000 in an interest-bearing account. If your objective is to maximize your own net income, what would the interest rate have to equal for you to invest in the interest-bearing account?
Suppose you decide to buy the house, and now you have to decide whether/when to list the house on the short term rental market (like Airbnb) or stay in the house yourself. Briefly explain what this decision would depend on. What are the implicit (opportunity) costs associated with renting the house to someone else on a given day? What are the implicit costs associated with the staying in the house yourself?…
Consider a perpetuity with a coupon of 100. Imagine that the perpetuity is purchased at time t when the market interest rate is equal to 5%. Furthermore, imagine that the coupon income is taxed at 40% and that capital gains are taxed at 20%. What is the after tax rate of return if the perpetuity is sold at time t+1 when the market interest rate continues to be equal to 5%?
Chapter 17 Solutions
Microeconomic Theory
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- Suppose that the demand for loanable funds for car loans in the Milwaukee area is $10 million per month at an interest rate of 10 percent per year, $11 million at an interest rate of 9 percent per year, $12 million at an interest rate of 8 percent per year, and so on. If the supply of loanable funds is fixed at $15 million, what will be the equilibrium interest rate? If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be? What if the usury limit is raised to 7 percent per year?arrow_forwardSuppose that the demand for laonable funds for car in the Milwaukee area is $11million per month at an interest rate of 10 percent per year, $12million at an interest rate of 9 percent per year, $13million at an interest rate of 8 percent per year and so on. a. If the supply of loanable funds is fixed at $17million, what will be the equilibrium interest rate? b. If the government imposes a usury law and says that car loans cannot exceed 3 percent per year, how big will the monthly shortage (or excess demand) for car loans be? c. How big will the monthly shortage for car loans be if the usury limit is raised to 7 percent per year?arrow_forwardScenario 21-3 Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works an earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings. Refer to Scenario 21-3. If the interest rate on savings increases, a. Scott will always increase his savings in the work period. b. Scott will increase his savings in the work period if the income effect is greater than the substitution effect for him. c. Scott will decrease his savings in the work period if the income effect is greater than the substitution effect for him. Od. Scott will decrease his savings in the work period if the substitution effect is greater than the income effect for him. Carrow_forward
- Which of the following results in an increase in consumers’ lifetime wealth, i.e. an increase in the net presentvalue of lifetime income? (a) Increase in interest rate(b) Decrease in future wages(c) Decrease in interest rate(d) Decrease in current taxes, financed by an increase in future taxesarrow_forwardConsider an economy where individuals live for two periods only. Their utility function over consumption in periods 1 and 2 is given by U = 2 log(C1) + 2 log(C2), where C1 and C2 are period 1 and period 2 consumption levels respectively. They have labor income of $100 in period 1 and labor income of $50 in period 2. They can save as much of their income in period 1 as they like in bank accounts, earning interest rate of 5 percent per period. They have no bequest motive, so they spend all their income before the end of period 2. a. What is each individual’s lifetime budget constraint? If they choose consumption in each period so as to maximize their lifetime utility subject to their lifetime budget constraint, what is the optimal consumption in each period? How much do the consumers save in the first period? b. Suppose that the government introduces a social security system that will take $10 from each individual in period 1, put it in a bank account, and transfer it back to…arrow_forwardImagine you are the owner of a downtown Laredo building that you lease out for a yearly amount of $ 45,000 over a span of five years. Assume that the explicit expenses for maintaining the building are $ 20,000, and an additional implicit cost of $15,000 exists. All earnings and costs occur at the conclusion of each year. Suppose the interest rate is 7.5 percent, Determine the present value for both the stream of: (i) your accounting profits. Show your steps. (ii) economic profits. Show your stepsarrow_forward
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