An Individual Has an Income of $4,000 in Period 0

question 17

Essay

An individual has an income of $4,000 in period 0 and $0 in period 1. The individual has the potential investment opportunities given below:
Suppose that the market interest rate falls to 5%. What is the maximum possible consumption in period 1 if the individual takes on the optimal set of investment projects?
D.
Period 1 consumption is $1,620 + $2,400 + $910 = $4,930

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Definitions:

Market System

An economic system in which decisions regarding investment, production, and distribution are based on supply and demand, with minimal government interference.

Scarcity

The limits placed on the amounts and types of goods and services available for consumption as the result of there being only limited economic resources from which to produce output; the fundamental economic constraint that creates opportunity costs and that necessitates the use of marginal analysis (cost-benefit analysis) to make optimal choices.

Mixed Capitalism

An economic system blending elements of capitalism and socialism, featuring private enterprise alongside government regulation and interventions.

Invisible Hand

A concept introduced by Adam Smith to describe the self-regulating nature of the marketplace, where individual self-interests inadvertently benefit society.