# 50 principles of microeconomics 10 stockholders have

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Chapter 10 / Exercise 16
Microeconomics: Private and Public Choice
Gwartney/Stroup/Sobel/Macpherson
Expert Verified
50 Principles of Microeconomics 10. Stockholders have put up \$100,000 and receive dividends of \$30,000. With an interest rate of 10 percent, \$10,000 of this is the normal rate of return. The other \$20,000 is economic profit earned by the stockholders. 11. Physical capital would include the buildings, laboratories, photocopying equipment, chalkboards, desks, and chairs. Intangible capital would include human capital (the education and training possessed by professors, administrators, and staff) and the reputation of the institution. The value of the physical capital stock could be measured by estimating how much it could sell for on the open market. The value of intangible capital is much more difficult to assess. Other parts of the answer will vary depending on the school, but some examples might be building new dormitories, athletic centers, or libraries and their impact on the school’s reputation and on therefore, admissions and tuition revenue, alumni giving, and the ability to secure grants from private and government sources. 12. Answers will vary, but students should refer to assessing how good an investment the purchase of the building would be. Students will likely refer to how much of the space is rented and how much is vacant, and what the rent is per square foot. Taxes and other costs would also be relevant. The expectations that matter would also be about the demand for the space and its price, and would be shaped by economic trends affecting vacancy rates. 13. Answer will vary CHAPTER 11 APPENDIX 1. You would not be willing to pay \$1,900 because you can get the same \$2,000 by depositing \$2,000 divided by 1.1 or \$1,818.18 in a 10% account for a year. If you figure on \$181.82 in interest, the \$1818.18 becomes \$2,000 after a year. Thus, \$1818.18 is the maximum that you would be willing to pay. For \$2,000 after 2 years, your maximum offer would be \$1652.89 or \$2,000 divided by (1.1) 2 . 2. The present discounted value (PDV) of the inheritance is \$10,000/(1.065) 10 = \$5,327.26. You should accept your brother’s offer. If you invested \$6,000 for 10 years at 6.5% you would have \$6,000 x (1.065) 10 = \$11,262.82. 3. Disagree. The bridge cannot be justified on efficiency grounds, because simply investing the \$25,000,000 in the financial markets would generate a stream of income worth more to citizens than the benefits from the bridge, or stated another way, putting \$23,786,000 in a bank paying exactly the target rate of return will replicate the earnings from the building. However, at substantially lower interest rates, the PDV present discounted value (PDV) of the benefits would be higher and might exceed \$25,000,000. In that case, the bridge should be built. A B C D E @8% \$1,000 \$1,000 \$1,052 \$1,092 \$1,258 @10% \$924 \$903 \$1,000 \$1,000 \$1,208
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Chapter 10 / Exercise 16
Microeconomics: Private and Public Choice
Gwartney/Stroup/Sobel/Macpherson
Expert Verified
Solutions to Problems 51 At 8% interest, flow E is worth a current expense of \$1,235 because its present discounted value (PDV) of \$1,258 would exceed the expense. At an interest rate of 10%, the PDV of \$1,208 is less than the current expense; so the investment should not be undertaken.