Suppose a Project Requires an Initial Investment of $1,000 and It

question 3

Multiple Choice

Suppose a project requires an initial investment of $1,000 and it will yield $1,050 one year later.The NPV of the project is:

• A)Equal to $50
• B)less than 0 if the discount rate is less than 5 percent
• C)Zero if the discount rate is equal to 5 percent
• D)Positive if the discount rate is greater than 5 percent

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Definitions:

Consumer Optimum

A state where a consumer has allocated their resources in such a way that maximizes their utility, given their budget constraint.

Income Effect

The change in consumption that results from changes in real income, affecting the purchasing power of consumers.

Substitution Effect

The economic understanding that as prices rise or income decreases, consumers replace more expensive items with less costly alternatives.

Wage Increase

A rise in the rate of pay employees receive for their work.