C h a p t e r 2 4
1.
Michael is an Internet service provider. On December 31, 2007,
he bought an existing business with servers and a building worth
$400,000. During his first year of operation, his business grew
and he bought new servers for $500,000. The market value of
some of his older servers fell by $100,000.
a.
What was Michael’s gross investment, depreciation, and net
investment during 2008?
Michael’s gross investment was $500,000, his depreciation was
$100,000, and his net investment was $400,000.
b. Wha
t is the value of Michael’s capital at the end of 2008?
Michael’s capital at the end of 2008 is equal to his capital at
the beginning of 2008, $400,000, plus his net investment during
the year, also $400,000, for a total of $800,000.
2.
Lori is a student who teaches golf on the weekend and in a year
earns $20,000 after paying her taxes. At the beginning of 2007,
Lori owned $1,000 worth of books, CDs, and golf clubs and she
had $5,000 in a savings account at the bank. During 2007, the
interest on her savings account was $300 and she spent a total
of $15,300 on consumption goods and services. There was no
change in the market values of her books, CDs, and golf clubs.
a. How much did Lori save in 2007?
Lori’s saving equals her disposable income minus her consum
ption
expenditure. Lori’s disposable income is $20,000 plus the interest
on her savings account, $300, for a total of $20,300.Her
consumption expenditure is $15,300, so her saving is $5,000.
b. What was her wealth at the end of 2007?
Lori’s wealth at the e
nd of 2007 is equal to the value of her wealth
at the beginning of 2007 plus her saving during the year. At the
beginning of 2007 Lori’s wealth is $6,000—
the value of her books,
CDs, golf clubs, and savings account. Lori saved $5,000 during
2007 so her wealth at the end of 2007 is $11,000.