Economics Homework Eleven - Model

1. 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.

2. Suppose I loaned you $1000 today, and interest rates are 5% per year (compounded annually), and you repaid the loan plus interest in 2 years, then what is the total you would pay to satisfy this debt?

$1,000 x 1.05 = $1,050 ----- $1,050 x another 1.05 = $1,102.50 So, I would pay you $1,102.50 to satisfy the debt. (Trish)

3. Review: is the cost of the bus for a 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 may have several buses).

The cost of the bus for a trip to D.C. is a fixed cost, because the price of the bus won't change whether one person goes down or the bus is full. (Seth)

4. Which concept in Economics do you think is the best self-motivator, which you might use to achieve more?

“Carpe Diem”, seize the day, motivates you to accomplish as much as you can in the time you are given. You would use your time wisely if it was to be your last day on earth. We do not take the possibility of not having the privilege of living tomorrow it seriously. So live each day to the fullest as if it were your last. (Veronika)

5. 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.

To find the amount paid the second year, divide $1000 by 1.1. Then you take that number and you divide that by 1.1 again, and your result is $826.45, which is the answer. (Anna)

6. Pick another question from the midterm exam that you answered incorrectly, and explain the correct answer.

7. Explain what “economic rent” is in your own words, using your own example.

8. An agreement by different firms with each other to reduce output is illegal. Why should that be illegal?

This should be illegal because it is an attempt to create a monopoly out of the public eye. It could also be described as creating economic rent that would not exist in the unmanipulated market. Reducing output impedes the free market and causes loss of wealth, and to impede the market unnecessarily to make more money is harmful to the consumers. In fact, banning false reduction of output is a less involved procedure than breaking up a monopoly, and so possible harm due to regulation is also diminished by making this illegal. (Addison)

9. What is your favorite concept in Economics, and why?

10. Nash equilibrium, revisited: What is the Nash equilibrium for two gas stations (an oligopoly) that are situation 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".