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 that 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.

Answer 1

Answer : Static efficiency for one period of time means that at particular time period how efficiency is a firm to perform there activity. It means how they are producing productivity output through economic surplus has been dervied in an economy at particular time duration where as Dynamic efficiency is related to the improvement in techincal,allocative and productive efficiency over time duration . In dynamic efficiency , benefit -cost analysis that occured at different point of time. Here, the net benefit of one period has been properly compared with net benefit of another period.

Answer : Meaning of Discount Rate :

Discount rate is the rate of return used in making discounted in the cash inflows to determine the present value of future cash inflows. Discount rate means current worth of the future sum of money at particular rate of return.

Discounting rate is the rate at which future cash flow has been adjusted for the present day. In simple terms, Future cash flows has been adjusted with the discounting and get the present value.

Present value = Future cash inflows/ (1+r)ⁿ

Here r = Discounting rate

n = Number of years

The relation between future dollar and present dollar is the discounting rate. Discount rate is used to make comparsion the difference between present value and future value.

• It shows that dollar invested today earning a positive rate of return.
• Discount rate is used to make comparsion between future benefit and cost into single present value amount.

Answer : Today $1000 or One year after $1500

Present value of $1500

Present Value = Future Value/ (1+r)ⁿ

Present Value = 1500/ (1+0.10)¹

Present Value = $1363.63 / $1364

Therefore, $1500 one year after is more valueable as there present value is $1364 so it is more profitable to take $1500 amount year after.