Condition for an Investment to Expand the Feasible Set
For an investment financed by borrowing to be worthwhile, its rate of return must be greater than the borrowing interest rate. This is the condition required to expand the feasible set, offering better consumption opportunities. Julia, for example, would only proceed with her investment because its rate of return is higher than her borrowing rate of 78%.
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
Related
Julia's Strategy of Splitting a Loan for Consumption and Investment
Julia's Car Repair Investment: 200% Rate of Return
Julia's Investment-Based Feasible Frontier (Borrow at 78%, Invest with 200% Return)
Figure: Julia's Optimal Choice with and without Investment, Showing Points G and I
Condition for an Investment to Expand the Feasible Set
Julia's Endowment at (0, 100)
Evaluating a High-Interest Investment Loan
An individual has no current income but expects $100 in the future. They can borrow money from a payday lender at a very high interest rate (78%). If this individual uses the loan to fund a productive investment (e.g., repairing a car to work for a rideshare service) instead of for immediate consumption, what is the primary effect on their financial possibilities?
An individual who borrows money at a very high interest rate (e.g., 78%) to fund a productive investment will always end up in a worse financial position than if they had not borrowed at all, due to the high cost of the loan.
An individual has no current income and $100 of guaranteed future income. They can borrow money at a 78% interest rate. They also have an opportunity to use any borrowed funds for a productive investment with a rate of return higher than the interest rate. Which statement accurately describes the effect of this investment opportunity on their financial options?
An individual has no current income and $100 of guaranteed future income. They can borrow money at a 78% interest rate. They also have an opportunity to use any borrowed funds for a productive investment with a rate of return higher than the interest rate. Which statement accurately describes the effect of this investment opportunity on their financial options?
High-Interest Loans: Consumption vs. Investment
An individual has no income today but is guaranteed $100 in the future. They can borrow from a lender at a 78% interest rate. They are considering using the borrowed money for a productive investment (e.g., repairing a car to start a delivery service) instead of for immediate consumption. For this investment to be a financially rational decision that improves their overall set of possibilities, what must be true about the investment's rate of return?
Evaluating a High-Interest Productive Loan
Analyzing Loan Use: Consumption vs. Productive Investment
Rationality of High-Interest Loans for Investment
Learn After
An entrepreneur is considering an investment that costs $2,000. This investment is projected to generate a total income of $2,500 after one year. To finance this, the entrepreneur must take out a one-year loan for the full amount. Under which of the following loan conditions would this investment expand the entrepreneur's set of consumption possibilities, making it a profitable venture?
Evaluating Investment and Financing Options
Analyzing an Unprofitable Investment
An individual borrows $10,000 to fund a project that is expected to yield a total income of $15,000 after one year. The interest rate on the one-year loan is 60%. True or False: This investment will expand the individual's set of possible consumption choices.
An individual is considering a project that requires an initial outlay of $5,000 and is expected to generate a total income of $5,750 one year later. To be a worthwhile venture that expands the individual's set of possible consumption choices, the interest rate on a loan used to fully finance the project must be less than ______%.
Critiquing an Investment Strategy
An investor is considering several distinct projects, each requiring a loan for the full investment cost. Match each project scenario with the correct effect on the investor's feasible set of consumption possibilities.
Analyzing a Suboptimal Investment Decision
Evaluating a Business Proposal
Modifying an Investment Proposal for Profitability