Question 1 A firm uses capital to produce revenue. The marginal revenue from the

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Question 1

A firm uses capital to produce revenue. The marginal revenue from the first 5 units of capital is as follows: 1st unit has MR 1.85, 2nd unit has MR 1.71, 3rd unit has MR 1.6, 4th unit has MR 1.52, and 5th unit has MR 1.43. If the interest rate is 55%, what is the optimal amount of capital for this firm to borrow?

Question 2

Consider the MR figures in Problem 1. If this firm borrows exactly 5 units of capital, what is the firm's total revenue?

Question 3

Say a household has a wealth endowment of $5 and can use this to either consume (C) or save (S). Savings earn interest of 11% and consumption yields marginal benefit as follows: 1st $1 has MB $2.2, 2nd $1 has MB $1.81, 3rd $1 has MB 1.39, 4th $1 has MB 1.12, and 5th $1 has MB of $1.02. To maximize the sum of earnings on savings and benefit from consumption, the household should pick

Question 4

Consider the MB schedule described for the household in question 3, and the MR schedule described for the firm in question 1. If the interest rate is 55%, is this a market clearing interest rate? (Hint: makes sure you calculate S for the household).

Question 5

Consider the MR schedule for the firm given in Problem 1, and the MB schedule given for the household in Problem 3. If the interest rate is 65%, then in the market for funds there is

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Explanation / Answer

*For solution to other parts please post as aseparate parts >Supposed to do only these many questions.

Capital MR TR 1 1.85 1.85 2 1.71 3.56 3 1.6 5.16 4 1.52 6.68 5 1.43 8.11 1) since the MR> MC for production so firms will hire all 5 units. 2) Total reenue from 5 units of capital is 8.11. Dollar MB savings MB from saving 1 2.2 0.11 0.11 2 1.81 0.22 0.11 3 1.39 0.33 0.11 4 1.12 0.44 0.11 5 1.02 0.55 0.11 3) he will consume 4 dollars because utility fro consuming fifth dollar will be (1.02-1)<0.11 that is gain from consuming is less than return from saving.

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