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Microsoft Word - Solution-Chapter-7

# Microsoft Word - Solution-Chapter-7 - Chapter 24 1 Michael...

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C h a p t e r 2 4 1. Michael is an Internet service provider. On December 31, 2007, heboughtanexistingbusinesswithserversandabuildingworth \$400,000.Duringhisfirstyearofoperation,hisbusinessgrew 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\$20,000afterpayinghertaxes.Atthebeginningof2007, 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 ndof2007isequaltothevalueofherwealth at the beginning of 2007 plus her saving during the year. At the beginningof2007 Lori’swealthis \$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.

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3. FirstCall,Inc.isacellularphonecompany.Itplanstobuild an assembly plant that costs \$10 million if the real interest rateis6percentayear.Ifthereal interest rate is 5 percent a year, First Call will build a larger plant that costs \$12 million. And if the real interest rate is 7 percent a year, First Call will buildasmallerplantthatcosts\$8 million. a. Draw a graph of First Call’s demand for loanable funds curve. Figure 7.1 shows First Call’s demand for loanable funds curve. b. FirstCallexpectsitsprofitfrom the sale of cellular phones to double next year. If other things remain the same, explain how this increase in expected profit influences First Call’s demand for loanable funds. When First Call expects its profit to increase, First Call increases its investment. The increase in its investment leads First Call to increase its demand for loanable funds. 4. Draw a graph to illustrate how an increase in the supply of loanable funds and a decrease in the demand for loanable funds can lower the real interest rate and leave the equilibrium quantity of loanable funds unchanged. Figure 7.2 shows the effect of an increase in the supply of loanable funds and a decrease in the demand for loanable funds. The supply of loanable funds curve shifts rightwardfrom SLF 0 to SLF 1 ,andthe demand for loanable funds curve shifts leftward from DLF 0 to DLF 1 .
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Microsoft Word - Solution-Chapter-7 - Chapter 24 1 Michael...

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