Attempts: Keep the Highest: /4 4. Computing the rental rate of capital Aa Aa Con

Question

Attempts: Keep the Highest: /4 4. Computing the rental rate of capital Aa Aa Consider the rental rate of capital for an appliance rental company like Rent-A-Center. Suppose Rent-A-Center buys televisions at the market price (P) of $3,000 each and rents them out to customers. The company faces an interest rate (r) of 15% per year, and televisions depreciate at 25% per year. Fill in the following table with the interest cost per year and the loss due to wear and tear for each television per year. Dollar Amount per Television Borrowing cost per year Depreciation cost Assume that firms renting televisions earn zero profit. capital, in this case, is Using the information in the previous table, the rental rate of per year per television. Suppose the depreciation rate decreases due to improvements in the materials used to make televisions. This should cause the equilibrium rental rate to increase decrease

Explanation / Answer

1. Borrowing cost per year = 0.15*3000 = $450

Depreciation cost = 0.25*3000 = $750.

2. Rental rate of capital = $(450+750) = $1200.

Reason: since profit is zero, rental rate must be equal to the total cost of depreciation and interest.

3. The correct answer is: decrease

Reason: Now, the total cost of capital has decreased, thus the equilibrium rental rate must decrease.

Thanks!

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