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Chapter 21: Q. 21.3LO (page 465)

Discuss how the interest rate performs a key role in allocating resources and calculate the present discounted value of a payment to be received at a future date

Short Answer

Expert verified

There is less danger than if the dollar were used in a long-term investment that may or may not produce the desired returns.

Step by step solution

01

Given Information.

This is because a cent today is employed to earn more money in the future, lowering the value of a dollar over time and resulting in a decrease in economic currency value.

02

Explanation.

  • Today鈥檚 dollar is additionally more valuable because there's less risk than if the dollar was during a long-term investment, which can or might not yield the expected results.
  • On the opposite hand, delaying payment from an investment could also be beneficial if there's a chance to earn interest.
  • The longer payment is delayed, the more available earning potential there's. this may be enticing to businesses and will persuade them to require onthe chance of deferment.

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Most popular questions from this chapter

You expect to receive a payment of $104one year from now.

a. Your rate of discount is 4percent. What is the present value of the payment to be received?

b. Suppose that your rate of discount rises to 5percent. What is the present value of the payment to be received?

If you were a government official, would you rather have to deal with many small businesses or a few large corporations?

Which of the following individuals would you expect to have a high level of economic rent, and which would you expect to have a low level of economic rent? Explain why for each.

a. Bob has a highly specialized medical skill shared by very few individuals.

b. Sally has never attended school. She is 25 years old and is an internationally known supermodel.

c. Tim is a high school teacher and sells insurance part-time.

Consider Figure 21-2. Explain why the figure indicates that if the normal rate of return on investment were to remain unchanged while accounting profit increased, economic profit also would increase.

Reconsider Figure 21-1 and the data provided in Problem 21-19, and suppose that P2=$2,800 per acre. By how much do economic rents change when the rental rate on land rises from P1toP2 in the figure?
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