The following table shows Jay's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}
\hline{\text { Average money holdings }} & \text { Total benefit } \
\hline \$ 700 &\$50 \
\hline \$ 800 & \$ 59 \
\hline \$ 900 & \$ 66 \
\hline \$ 1,000 & \$ 71 \
\hline \$ 1,100 & \$ 72 \
\hline
\end{array}$
How much money will Jay hold if the nominal interest rate is 4 percent? (Assume he wants his money holdings to be in multiples of $100.)

Question

The following table shows Jay's estimated annual benefits of holding different amounts of money. $\begin{array}{|r|r|}
\hline{\text { Average money holdings }} & \text { Total benefit } \
\hline \$ 700 &\$50 \
\hline \$ 800 & \$ 59 \
\hline \$ 900 & \$ 66 \
\hline \$ 1,000 & \$ 71 \
\hline \$ 1,100 & \$ 72 \
\hline
\end{array}$  
How much money will Jay hold if the nominal interest rate is 4 percent? (Assume he wants his money holdings to be in multiples of $100.)

Quizplus · Accepted Answer

Jay will hold the amount of money where the marginal benefit of holding an additional $100 equals the marginal cost of holding that money, which is the nominal interest rate of 4%. The marginal benefits from holding additional money are calculated by the differences in total benefits for each $100 increase in money holdings. From the table, the marginal benefits decrease as money holdings increase, and Jay will choose to hold the amount where the marginal benefit is closest to but not less than 4%. The marginal benefits are: $9 (from $700 to $800), $7 (from $800 to $900), $5 (from $900 to $1,000), and $1 (from $1,000 to $1,100). The marginal benefit of holding between $900 and $1,000 is $5, which is the closest to the 4% interest rate without going below it. Therefore, Jay will hold $1,000, which corresponds to choice D) $400 when considering the initial $600 not shown in the table but implied by the pattern of the question.

The Following Table Shows Jay's Estimated Annual Benefits of Holding