E202Solutions6.3

# E202Solutions6.3 - year If you find both jobs equally satisfying and the annual interest rate is 10 percent what is the highest price you would be

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they will sell for this price. The buyers of the licenses will make no economic profit. 8. You have a friend who is a potter. He holds a permanent patent on an indestructible teacup whose sale generates \$30,000 a year more revenue than production costs. If the annual interest rate is 20 percent, what is the market value of this patent? Answer : The market value is how much money someone would need to put in the bank at 20 percent interest to generate annual earnings of \$30,000. This amount is \$30,000/.2 = \$150,000. 9. You have an opportunity to buy an apple orchard that produces \$25,000 per year in total revenue. To run the orchard, you would have to give up your current job, which pays \$10,000 per
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Unformatted text preview: year. If you find both jobs equally satisfying, and the annual interest rate is 10 percent, what is the highest price you would be willing to pay for the orchard? Answer : Owning the orchard is owning a stream of \$25,000 - \$10,000 = \$15,000 each year, net of the opportunity cost of your time. The highest you would be willing to pay for the orchard is the value that yields zero economic profit, the value which, invested in a bank at 10 percent interest, would also yield \$15,000 a year. Since \$150,000 (0.10) = \$15,000, that amount is \$150,000....
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## This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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