3) Marco has $100 worth of grain in period 1 but gets no grain in period 2. Marco has two choices. He can store the grain that he does not consume in period 1. This results in a loss of 20% of the grain due to pests. Assume that with this option he will choose to consume 68 units of grain in period 1 and 26 units in period 2. Instead, Marco can sell the grain he does not consume in period 1 and lend the money from that sale to someone today at an interest rate of 10%. He can then use the repayment of that loan to buy gain in period 2. a) Based on this information, draw a diagram that outlines Marco's choices. Is he definitely better off once the opportunity to lend is available to him? b) Relative to his initial equilibrium point, does he unambiguously consume more in both periods once he can lend out the excess he does not consume in period 1? c) Now assume that Marco can sell any excess grain he doesn't consume in period 1 and invest the money he gets in a new type of risky activity. There is a 50 per cent chance that it makes a return of 25 per cent on his investment in that activity, and a 50 per cent chance it makes zero return (but he will not lose the money he invested in the scheme). Give reasons why Marco would or would not undertake this investment (there is no need to draw a graph).
3) Marco has $100 worth of grain in period 1 but gets no grain in period 2. Marco has two choices. He can store the grain that he does not consume in period 1. This results in a loss of 20% of the grain due to pests. Assume that with this option he will choose to consume 68 units of grain in period 1 and 26 units in period 2. Instead, Marco can sell the grain he does not consume in period 1 and lend the money from that sale to someone today at an interest rate of 10%. He can then use the repayment of that loan to buy gain in period 2. a) Based on this information, draw a diagram that outlines Marco's choices. Is he definitely better off once the opportunity to lend is available to him? b) Relative to his initial equilibrium point, does he unambiguously consume more in both periods once he can lend out the excess he does not consume in period 1? c) Now assume that Marco can sell any excess grain he doesn't consume in period 1 and invest the money he gets in a new type of risky activity. There is a 50 per cent chance that it makes a return of 25 per cent on his investment in that activity, and a 50 per cent chance it makes zero return (but he will not lose the money he invested in the scheme). Give reasons why Marco would or would not undertake this investment (there is no need to draw a graph).
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter22: Inflation
Section: Chapter Questions
Problem 7SCQ: Go to this website (http://www.measuringworth.com/ppowerus/) for the Purchasing Power Calculator at...
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Transcribed Image Text:3) Marco has $100 worth of grain in period 1 but gets no grain in period 2. Marco
has two choices. He can store the grain that he does not consume in period 1. This
results in a loss of 20% of the grain due to pests. Assume that with this option he
will choose to consume 68 units of grain in period 1 and 26 units in period 2.
Instead, Marco can sell the grain he does not consume in period 1 and lend the
money from that sale to someone today at an interest rate of 10%. He can then
use the repayment of that loan to buy gain in period 2.
a) Based on this information, draw a diagram that outlines Marco's choices. Is he
definitely better off once the opportunity to lend is available to him?
b) Relative to his initial equilibrium point, does he unambiguously consume
more in both periods once he can lend out the excess he does not consume in
period 1?
c) Now assume that Marco can sell any excess grain he doesn't consume in
period 1 and invest the money he gets in a new type of risky activity. There is a
50 per cent chance that it makes a return of 25 per cent on his investment in
that activity, and a 50 per cent chance it makes zero return (but he will not
lose the money he invested in the scheme). Give reasons why Marco would or
would not undertake this investment (there is no need to draw a graph).
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