A. Today you make an investment of $500 with a nominal interest rate of 6% compo

Question

A. Today you make an investment of $500 with a nominal interest rate of 6% compounded annually. You expect the rate of inflation to be 2% each year over the next three years. What is the real interest rate you will make on your investment? What is the future value of your investment in three years?



B. Compare Perfect competition, monopoly and monopolistic competition. How are these three types of markets similar? How are they different? (Hint: Do not just list the definitions of these types of competitive markets. Be specific in how they are alike and how they are different, and use examples to illustrate your answer.)

Explanation / Answer

ans A)

real interest rate = nominal interest rate - rate of infation = 6-2 = 4%

Future Value = 500(1+0.06)3 = 595.51

ans b)

simialrity

all three are different forms of market

in each market , equilibrium is determined at MR= MC

dissimilarity

in perfect competitive market , P=AR= MR

but in monopolistic competitive and monopoly market , P=AR>MR

therefore production is moe in case of perfect competition as compared to other markets

perfect competitive firms produce homogeneous goods whereas monopoly and monopolistic markets produce heterogeneous goods. therefore perfect competiotive firms are price takers while monopoly firms and monopolistic competitive firms are price maker

perfect competitive market are more efficient than other markets

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