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| | 6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason. | | 6. If you were to loan someone money, why would you want him to pay you something extra (interest) when he pays back the loan? Give at least one reason. |
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| | + | :Here are two reasons: the time value of money, and something extra to compensate you for taking the risk that your loan will not be paid back. |
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| | 7. Review: is the cost of the bus for the March for Life trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we used several buses). | | 7. Review: is the cost of the bus for the March for Life trip to D.C. a "fixed cost" or a "variable cost"? Explain, assuming for the purpose of this question that one and only one bus can be used (in reality, we used several buses). |
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| | + | :The cost of the bus is a fixed cost, because it is the same cost whether there is one person on the bus (or no one), and whether there are 47 people on the bus. The cost does not "vary" with the output. |
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| | 8. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work. | | 8. Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually. How much should you pay me today to receive $1000 in two years? Show your work. |
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| | + | :Work backwards: at 10% interest, $1000 in two years is the same as $1000/1.1=$909.09 in one year. That is because $909.09 generates $1000 in one year at 10% interest. |
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| | + | :Then we have to work backwards one more year to get to "today": $909.09/1.1=$826.45. So the answer is $826.45 - that is what we would need to receive today for it to be the same as $1000 in two years, at 10% interest compounded annually. |
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| | + | :Check our answer: $826.45 times 10% = $82.65. Add that and our total in one year is it would require $1000/1.1=$909.10. Repeat that process for the second year and the total is $909.10 plus $90.91=$1000.01 (the extra penny is due to rounding error). |
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| | ===Honors=== | | ===Honors=== |
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| | 12. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal? | | 12. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal? |
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| | + | :Yes, because reducing output is harmful to the public. |
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| | 13. Nash equilibrium, revisited: What is the [[Nash equilibrium]] for two gas stations (an oligopoly) that are situated immediately across the street from each other? In other words, what price do they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium". | | 13. Nash equilibrium, revisited: What is the [[Nash equilibrium]] for two gas stations (an oligopoly) that are situated immediately across the street from each other? In other words, what price do they sell at, expressed in terms of one of their cost measures? Explain the process that reaches that "equilibrium". |
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| | + | :They sell at MR=MC. If one firm were to sell higher, than the other firm would boost its profits by reducing its price to where MR=MC. |
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| | [[Category:Economics lectures]] | | [[Category:Economics lectures]] |