The owner of Joe’s Burgers is thinking about building a second fast food restaur

Question

The owner of Joe’s Burgers is thinking about building a second fast food restaurant across town. The second restaurant would cost Joe $1 million to build. The owner, having more than enough money to build the new building, states that she does not need to consider the market rate of interest in deciding whether or not to build the new restaurant because she does not need to borrow the money. Is the owner correct in her statement about not needing to consider the market rate of interest? Please clearly explain your reasoning. The owner of Joe’s Burgers is thinking about building a second fast food restaurant across town. The second restaurant would cost Joe $1 million to build. The owner, having more than enough money to build the new building, states that she does not need to consider the market rate of interest in deciding whether or not to build the new restaurant because she does not need to borrow the money. Is the owner correct in her statement about not needing to consider the market rate of interest? Please clearly explain your reasoning.

Explanation / Answer

Even though Joe doesn't need the bank's money to finance the new building, still she should know the market interest rate. The market interest rate will impact the consumption of other people who will come in her restaurants. Therefore, in order to decide on the demand of her restaurant she will need to know the market rate. The interest rate wil determine if the people in the economy have enough disposable income to come and eat at her restaurants.

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