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assign2-key - Answer key assignment two Version 1.0(October...

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Answer key, assignment two Version 1.0 (October 6, 2008). Compiled by Corey Garriott 1 The J. Browns This question asks for a spreadsheet with assets and liabilities. Liabilities are anything an agent owes to others. Assets are anything the agent owns that can be converted into cash. Some assets are “tangible,” meaning physical, accessible property—land, buildings, even mere cash in the bank. However, a lot of interesting assets are “intangible,” meaning they have an unclear and ever- changing value. Examples are stocks, bonds, and (of course) expected payments on loans such as mortgages. John’s assets John’s liabilities Bank $2,000 Nice car $20,000 Expected payment from Joan for loan $17,000 House $50,000 Mortgage* $45,000 Joan’s assets Joan’s liabilities Bank $1,000 Older car $11,000 Shiny baubles $2,000 Money she owes John $17,000 Money she owes Mastercard $700 House $50,000 Mortgage* $45,000 BrownFam assets BrownFam liabilities Bank $3,000 Cars $31,000 Shiny baubles $2,000 Money owed to Mastercard $700 House $100,000 Mortgage* $90,000 * Legally, a mortgage is not a liability per se but evidence of one. If the mortgage is not paid the lender can reclaim the house and apply its value toward the outstanding debt. If that’s not enough, the mortgage lender does not necessarily have any right to other assets worth the remainder of the unpaid mortgage. 1
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2 Financial situation of a typical graduate student The question asks for “my own” balance sheet. And wouldn’t you like to know. Actually you’re probably not that interested. So for both our sakes, here instead is one for a typical Joe Graduate student in the United States. Let’s call him “C. Mang.” C. Mang’s assets C. Mang’s liabilities Used 1999 Honda Civic $2,500 Cutting-edge Power-X Wunder-Top $5,000 Bank $31.97 Useless textbooks $1,000 Nerdy gadgetry $2,500 Silverware $3 Other kitchen devices $3 Moldy takeout $0.10 Student loans $100,000 $11,256.10 $100,000 Net worth: - $88 , 743 . 90 3 Rep. agent calculus 3.1 MPL ∂f ( L ) ∂L = ( AL ) ∂L = A In the biz, we call this “constant returns to scale” in the one factor, labor. 3.2 Slope of an indifference curve Quick review here: An indifference curve is an expression of the marginal tradeoff an agent is willing to make between two goods. For example, suppose I told you I’ll accept a minimum of exactly two apples in exchange for one pear. The ratio at which I am willing to trade apples for pears is: 2 apples 1 pear and because this is the minimum amount of apples I’ll trade a pear for, the trade leaves me indifferent, hence this the slope of my indifference curve between apples and pears.
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