Question

Suppose the inflation rate in Canada is 2% and is expected to remain 2% for the upcoming year. Bank deposits pay 3% annual interest rate in Canada. Suppose you deposit $100 at a bank. a. In nominal terms, your savings will grow to _$ next year. b. Due to inflation, the real value of your savings account next year is c. What is the real rate of return on your savings? A firm is considering buying a machine that will lead to additional revenue of $150 at the end of this year. The machine costs $100 and has a useful life of one year. The interest rate is 8%. a. What is the opportunity cost of buying the machine? b. What is the benefit (to the firm) of buying the machine? c. Should the firm buy the machine? d. If the principle of diminishing marginal returns applies, the additional revenue from another machine will be

Answer 1

TT In Pation rate) - 2%, i (inderest rate) = 3% -0.03 s Principal de parist) = $1m ; The Sewings will grow ito = (1-P 2 P = (1.03) (low) a) 6) reel interest rate (2) - interest rele (i)- Inflation (1) = 32.-29. 17. real vehre of savings = (1+r)p = (1+0.01 21100) - C) red rate of return= 1% . Holution 2: 84 muchine bought Modiffond Revenue = $150 Cost of machine (6) $100; i = 8% - 97 the opportunity cost is the value of next best maternative use. If the money it deposited then - money After year = (Itine = (1.062 1700) b) the benefit of the firm - Additional Revenue-w. $150 - 100 do the benefit firm should buy machine - dr of the prinuple of diminishing margindocturn Abblies the badditional revenue from another machine will be less