1. oprah just inherited a house with a market value of 150,000 and she does not
ID: 1229710 • Letter: 1
Question
1. oprah just inherited a house with a market value of 150,000 and she does not expect the market value to change. Each year, will pay 300 for utilities and 2000 in taxes. She can earn 4 percent on money in a bank account. Her cost of living in the house for the year is $
2. the cost of flower business. Jen left job paying 40,000 per year to start her oen florist shop in a building she owns. the market value of the building is 200,000. She pays 40,000 per year for flowers and other supplies, and has a bank account that pays 6 percent interest. What is the economic cost of Jen's business?
3. Inflation and interest rates. Len buys MP3 music at $1 per tune, and prefers music now to music later. He is willing to sacrifice 10 tunes today as long as he gets at least 12 tunes in a year. When Len loans $50 to sam for one-year period, he cuts bak his music purchases by $50 tunes.
a. Len is willing to sacrifice 10 tunes today as long as he gets at least 12 tunes in a year. Len expects sam to repay him the equivalent of ----- tunes, so the implied interest rate is -------percent. To make Len indifferent about making the loan, sam must repay him $--------
Explanation / Answer
the real earnings you subtract inflation from the interest you earn. Here the rate of interest is 5% and inflation is 6%, so you earn 5 - 6 = -1% interest. $10,000 * -0.01 = -$100 per year 2. To keep you real income constant, you will want your salary to increase by as much as the increased cost of housing. If it is 30,000 in Cleveland, and in California it is 55% more, then your housing cost would be 30,000 * .55 = $16,500 more in California than in Cleveland. Assuming all other prices are the same, you will want to make $86,500 to keep your real income constant, so this is your new target salary 3. Yes, the additional cost of the cab is only $50 (4850-4800) while the additional revenue is $100. The taxi company would be able to earn an additional $50 in profits by adding the 10th cab
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