ECON-UA 2 Lecture : Day 22 (4/29/14)

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8 May 2014

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Ads n a c i r e m. It would make sense for each company to run safety ads. Yet this doesn"t happen because its agreed upon to not go there . It would be bad for both to get into competition over safety. Choice: 1,000 now, 1,000 1 year from now. You should prefer a because assuming there is positive interest rate you can convert it into more than a thousand in a year. What is the number of dollars ( x ) received today that has the same value to you as ,000 to be received i year from now? (same as: what is the present value of ,000 in 1 year?) Assume for now: one interest rate in economy, you can borrow and lend at that interest rate. R = 10: there is no uncertainty. For x to be the pv of in one year, x(1+. 10) = 1,000 x = 1,000/1. 1 = . 09.

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New York University is one of the most âliberalâ law schools in the country. However, in spite of the political leanings of the faculty and the students, the vast majority of its law graduates enter lucrative large firm law practices, not public interest work. To encourage students to enter public interest careers, the law school is considering two policies â a loan forgiveness program if students go into public interest careers or a scholarship program for people who say they want to go into public interest law (they would have to pay back the scholarship if they do not go in to public interest law). Suppose the two programs could be established in a way that the present value of the benefit to students going into public interest law was the same if the rate at which individuals could borrow money at was 10 percent. Do you think students would prefer one or the other option? Would all students have the same preferences? Why?

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How would I respond to this post below. I just need something very short.

If I had a fixed 30-year mortgage and the economy experienced unanticipated inflation,the borrower would be the winner and the lender would be the loser in the given scenario. The reason being is if a society experiences unanticipated inflation, individuals and institutions will change their behavior. For example, potential homeowners will not be able to borrow from banks at fixed rates of interest, but will be required to accept loans whose rates can be adjusted as inflation rates change. Banks do not want to lend money at a fixed interest rate if there is a strong likelihood that inflation will erode the real value of the income stream they expected. However, if banks become reluctant to make loans with fixed interest rates, this imposes more risk on homeowners. In this scenario the fixed loan was made prior to the unexpected inflation sodebtors will gain at the expense of creditors. Creditors, on the one hand, will lose because inflation will erode the amount of money they planned to earn on the loans. Since the loans have already been made, there

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ECON-UA 2 Lecture : Day 22 (4/29/14)

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