Question 1

A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%, what is the bond worth today (rounded to the nearest 100)?

Accepted Answer

B

Question 2

A decrease in a wage taxes causes the opportunity cost of leisure to increase.

Accepted Answer

A decrease in wage taxes increases the after-tax wage rate, making work more financially rewarding compared to leisure, thus increasing the opportunity cost of leisure.

Question 3

The opportunity cost of current consumption differs for borrowers and savers only if the interest rate for savers differs from the interest rate for borrowers.

Accepted Answer

The opportunity cost of current consumption is the foregone benefit of saving or investing instead of consuming now. This cost is determined by the prevailing interest rates in the financial market. If the interest rate for savers is higher than the interest rate for borrowers, then the opportunity cost of current consumption is higher for savers than borrowers, as savers are giving up more potential return by not saving or investing. Therefore, the statement is true.

Question 4

In the typical leisure/consumption model, an increase in the wage is equivalent to a decrease in the price of the composite consumption good.

Accepted Answer

According to the leisure/consumption model, an increase in the wage allows individuals to have more leisure time or more consumption. An increase in the wage raises the opportunity cost of leisure and thus individuals may choose to work more, resulting in an increase in income and consumption. Conversely, if the wage initially decreases, individuals may choose to work less, resulting in a decrease in income and consumption. Therefore, an increase in the wage is equivalent to a decrease in the price of the composite consumption good in the leisure/consumption model.

Question 5

An "endowment" is something whose value is unknown.

Accepted Answer

An endowment is a donation or gift of money or property to an organization or institution, and its value is usually specified or known.

Question 6

Suppose you earn annually compounding interest of 10% (per year) on an initial investment of $1,000.Rounded to the nearest 100, what will your balance in 10 years be?

Accepted Answer

Using the formula for compound interest, we can find the balance after 10 years:
Balance = $1000*(1+0.10)^10 = $2,593.74 
Rounding to the nearest 100, we get $2,600 as the answer, which is option C.

Question 7

A bond that promises to pay $X in 10 years must be worth less than $X now.

Accepted Answer

This is because of the time value of money, where money today is worth more than the same amount of money in the future due to inflation and the opportunity cost of not having the money available for investment or consumption. Therefore, the bond must be priced at a discount to its face value in order to compensate investors for the time value of money.

Question 8

In choice sets, intertemporal budget constraints illustrate consumption trade-offs over time.

Accepted Answer

Intertemporal budget constraints are used to represent consumption choices made over different periods of time, taking into account the limits on available resources. These constraints can provide insights into the trade-offs between present and future consumption, and how they affect overall consumption patterns.

Question 9

Since interest rates for borrowing are usually higher than interest rates for savings, the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.

Accepted Answer

The intertemporal budget constraint typically represents a straight line when plotted, reflecting the trade-off between current and future consumption without an inward kink. The difference in interest rates for borrowing and saving affects the slope of the budget constraint but does not cause it to kink.

Question 10

An increase in the interest rate is an increase in the opportunity cost of consuming in the future.

Accepted Answer

An increase in the interest rate actually increases the opportunity cost of consuming now, not in the future, because it makes saving more attractive.

Question 11

Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour.

Accepted Answer

The answer of Write down the budget constraint equation as...

Question 12

Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.

Accepted Answer

Changes in interest rates affect borrowers and savers differently, causing their intertemporal budget lines to rotate in opposite directions. For savers, an increase in interest rates typically makes future consumption more attractive, rotating the budget line outward for future periods. For borrowers, an increase in interest rates makes borrowing more expensive, potentially rotating their budget line inward for future consumption.

Question 13

Suppose a worker gets a weekly check equal to $1,000 from a risk-free investment, has 60 hours of weekly leisure that can be devoted to work and can earn a wage of $40 per hour.
a.Illustrate this worker's budget constraint, with weekly leisure hours on the horizontal and weekly consumption (in dollars) on the vertical.b Illustrate what happens to this worker's budget constraint when the weekly investment check increases to $1,500.
c.Illustrate what happens to this worker's budget constraint when instead the wage increases to $50 per hour.
d.Suppose the worker can hire help at $20 per hour, and each hour of help adds a half an hour to his available leisure.Will the budget constraint described in (a) change?

Accepted Answer

The answer of Suppose a worker gets a weekly check...

Question 14

Progressive wage taxes cause worker leisure/consumption budgets (with leisure on the horizontal axis) to become steeper as leisure increases.

Accepted Answer

Progressive wage taxes cause the budget line to become flatter as income increases, not steeper, because the marginal tax rate increases with higher income, reducing the marginal gain from working additional hours.

Question 15

In the worker's leisure/consumption model, the wage is the same as the price of consumption.

Accepted Answer

In the worker's leisure/consumption model, the wage represents the opportunity cost of leisure (i.e., what is foregone by not working), while the price of consumption refers to the cost of goods and services consumed. These two are conceptually different and not necessarily equal.

Quiz 3: Economic Circumstances in Labor and Financial Markets

A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%, what is the bond worth today (rounded to the nearest 100) ?