If there are decreasing opportunities for businesses to make profitable investme
ID: 1139118 • Letter: I
Question
If there are decreasing opportunities for businesses to make profitable investments in the economy, then in the bond market we should find that the equilibrium interest rate will ____ and the equilibrium price will ____.
A security promises a future cash flow of exactly $4,200 in 5 years and $1,001 in 6 years. If the interest rate is 15%, then what is the present value of this security?
$4,037.8
$4225.5
A firm uses capital K to invest in its business and the marginal revenue is: 1st K $1.94, 2nd K $1.52, 3rd K $1.36, 4th K $1.20 and 5th K $1.12. If the interest rate is 46%, and the firm borrows the optimal amount of capital, what is the firm's total revenue?
fall; fallExplanation / Answer
When profitable business opportunities are rare, business investment declines and this reduces demand for funds. Hence interest rate falls and price of bonds rises. (Select fall, rise)
Present value = 4200*(1 + 15%)^-5 + 1001*(1 + 15%)^-6 = 2520.90 Select (2520.9)
Because the interest rate is 46%, the marginal cost is $1.46 which implies that only 2 capital units will be hired as their marginal revenue is $1.52. This makes total revenue = $1.94 + $1.52 = $3.46. Select $3.46.