Question

What is the difference between static efficiency for one period in time and dynamic efficiency over multiple periods? What is the discount rate and how is it used to compare a future dollar benefit to a present-day benefit? Suppose you could have a sum of $1,000 today or 1,500 next year and the interest rate happened to be 10%. Which would be more valuable? Show your work. Yes this is supposed to be a single question just with multiple parts.

Answer 1

Static efficiency for one period does not consider future time period, whereas the dynamic efficiency of multiple period considers the future time periods and require efficient allocation of resources over the different periods under the consideration. Dynamic efficiency is achieved when firms choose to opt for projects that give higher net present value. But, it cannot be done in case of static efficiency.
Discount rate is the interest rate that is used to discount the future cash flows into the present time period. Afterwards, the present value of future cash inflows is compared with the present investment. If the present value of the future cash inflows are bigger than the present investment, then the project is accepted otherwise it is rejected.
As per the given data,
Present value of $1500 (in next year) = 1500/(1+R)
Here, R = 10%
So,
Present value of $1500 (in next year) = 1500/(1+10%) = $1363.64
Today’s sum for payment = $1000
Since present value of $1500 (in next year) is greater than the today’s sum of payment $1000, so it is better to accept $1500 in next year.