Demand and Supply Analysis Introduction-CFA Institute 3.(10 points) Jillis an ho

Question

Demand and Supply Analysis Introduction-CFA Institute 3.(10 points) Jillis an hourly worker for your fim who i allowed to chose ho wag. There (wage) substitution effect is smaller than her (wage) income effect. You just reducrly pay other jobs available for Jill. Which is correct regarding Jill's respomse to t the redoction in Jill will work fewer hours -Jill win work more hours Carefully EXPLAIN influences Jil's nser. Your answer must clearly and distinctly inchode: () how the (wage) income effect question depends almost entirely on your explanation.) and (ii) how the (wage) substitution effect influences Jill's decision. (Your credit for this substitution 4. (10 points) Your firm is offered an investment, as follows: If you pay $1 million today, then you will receive two cash payments: $800,000 exactly threeyears om today, and S 0 000 exactly seven years from today. QUESTON Should No your firm make this investment? (Check one): Yes EXPLAIN your answer using at least one complete, content rich sentence using at least one calculation, using the (You must show your calculations to receive amy credit for your answer.)

Explanation / Answer

Ans:

3)

Jill will work fewer hours.

Explanation

Income effect is the increase in demand for leisure,when income(wage) increases. This suggests Jill will work less.This is because leisure is normal good and increase in income(wage) will cause the quantity of leisure demanded to go up.

Substitution effect is the increase in price of leisure.which suggests that Jill will work more.

In this case Jill's wage substitution effect is smaller than her (wage) income effect.Hence Jill will work less.

4) Yes

Net present value = cash flow * 1/(1+r)^n

                           = -$1000,000 * 1/(1+0.045)^0 + $800,000 * 1/(1+0.045)^3 + $600,000 * 1/(1+0.045)^7

                            = -$1000,000 * 1/(1.045)^0 + $800,000 * 1/(1.045)^3 + $600,000 * 1/(1.045)^7

                             = -$1000,000 * 1 + $800,000 * 0.876 + $600,000 * 0.735

                            = -$1000,000 + $700,800 + $441,000

                            = $141800

Hence the net present value of the investment is $141800.Since the net present value is positive, firm should make this investment.

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