SolutionsCF8e-Ch11

SolutionsCF8e-Ch11 - Case/Fair Microeconomics Solutions...

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Case/Fair Microeconomics Solutions CHAPTER 11 1. All are except (b), (f), and (h). 2. (a) Disagree strongly. Savings is defined as household income minus consumption spending. It is that portion of income set aside for future consumption. Investment is new purchases of capital, plant, equipment, and inventory. Savings in the simple model is done by households and investment is done by firms. What is often confusing is the fact that saving is the source of resources used to finance investment spending. (b) Disagree. It is important to remember that when a household buys a share of stock or a bond, it is not investing in the economic sense of the word. Only when new capital is produced does investment take place. If a new firm sells shares to households and uses the proceeds to buy new machinery, the purchase of the new machinery is investment. (c) Disagree. Higher interest rates encourage saving but discourage investment. Interest rates determine in part the cost of investment. If the capital investment is financed with borrowing, higher interest rates increase the cost directly. If capital investment is financed with internal funds by a firm, higher interest rates increase the opportunity cost of the investment. 3. No. The total capital cost of the station is $1 million. With revenues of $420,000 and costs of $360,000, profit is just $60,000, which is a 6% yield on an investment of $1 million. If I can get 7.5% by investing in perfectly safe government securities, why buy a gas station? 4.
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SolutionsCF8e-Ch11 - Case/Fair Microeconomics Solutions...

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