Question

A.) A firm uses capital to produce revenue. The marginal revenue from the first 5 units of capital is as follows: 1st unit has MR 1.72, 2nd unit has MR 1.41, 3rd unit has MR 1.23, 4th unit has MR 1.15, and 5th unit has MR 1.11. If the interest rate is 20%, what is the optimal amount of capital for this firm to borrow?

A. 2

B. 3

C. 4

D.5

B.) Say a household has a wealth endowment of $5 and can use this to either consume (C) or save (S). Savings earn interest of 15% and consumption yields marginal benefit as follows: 1st $1 has MB $1.9, 2nd $1 has MB $1.55, 3rd $1 has MB 1.3, 4th $1 has MB 1.23, and 5th $1 has MB of $1.18. To maximize the sum of earnings on savings and benefit from consumption, the household should pick

A. C = 2

B. C = 3

C. C= 4

D. C= 5

C.) Consider the MB schedule described for the household in question 3, and the MR schedule described for the firm in question 1. If both the firm and household now face an interest rate of 28%, is this a market clearing interest rate? (Check whether supply of funds equals demand for funds)

A. Yes

B. No

C. Impossible to tell

D. none of the above

D.) Consider the MR schedule for the firm given in Problem 1, and the MB schedule given for the household in Problem 3. If the interest rate is now 22%, then in the market for funds there is

A. an excess demand for funds

B. an excess supply of funds

C. an equilibrium

D. none of the above

Answer 1