The interest rate is the opportunity cost of transferring spending power between time periods. However, the market mechanism may fail to provide adequately for future economic growth. List the reasons why a market might fail
Baumol and Blinder list the following three reasons why there may be a failure:
1 . Government may manipulate the interest rate to achieve various objectives with little regard to the impact on investment for future growth.
2 . Persons may suffer from "a defective telescopic faculty"-they may not give adequate weight to the future and may wish to consume today instead of invest for tomorrow.
3 . Some decisions have irreversible consequences, such as destruction of a unique natural habitat. Once "developed," it is gone forever. It may be unwise to leave these decisions to purely profit-driven motives.
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Consider an investment with the following payoffs and probabilities: State of the Economy Probability Return GDP grows slowly .70 1,000 GDP grow fast .30 2,000 Let the expected value in this example be 1,300 . How do we find the standard deviation of the investment?
a. ? = ? { (1000-1300)2 + (2000-1300)2 } b. ? = ? { (1000-1300) + (2000-1300) } c. ? = ? { (.5)(1000-1300)2 + (.5)(2000-1300)2 } d. ? = ? { (.7)(1000-1300) + (.3)(2000-1300) } e. ? = ? { (.7)(1000-1300)2 + (.3)(2000-1300)2 }
Which of the following is most likely to affect the supply of labor in any particular industry?
a. the size of the available working population b. the nonmonetary attractiveness of the job c. the amount of ability and training necessary to enter the job d. all of the above
While opportunity cost is subjective, in some circumstances the money paid for goods and services is a good approximation of their opportunity cost
Indicate whether the statement is true or false
Chapter 11
What will be an ideal response?