1. you earn 5 percent interest on funds in your money-market account. If consume

Question

1. you earn 5 percent interest on funds in your money-market account. If consumer prices increase by 6 percent per year, your real earnings on $ 10,000 in the money-making account are $---- per year

2. Suppose you currently live and work in cleveland, earning a salary of 70,000 per year and spending 30,000 for housing. you just heard that you will be transferred to a city in california where housing is 55% more expensive. In negotiating a new salary, your objective is to keep your real income constant.

your new target salary is---------

3. A taxi company has nine cabs in its fleet, and its total daily cost$ 4,800. If a taxi company adds a tenth cab, the company;s total daily cost will increase to 4,850 and its total revenue will increase by 100 dollars per day. should the company add the tenth cab?

Explanation / Answer

1. To compute 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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