Investment Decision Analysis
An entrepreneur is considering two mutually exclusive projects, both requiring a $10,000 investment that can be fully financed by a loan. The loan has an interest rate of 25%.
- Project A: Generates a total future income of $20,000 for every $10,000 invested (a 100% return).
- Project B: Generates a total future income of $15,000 for every $10,000 invested (a 50% return).
Which project offers a better set of consumption possibilities? Justify your choice by explaining how each project affects the entrepreneur's feasible frontier on a 'Consumption Now' vs. 'Consumption Later' graph.
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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
Evaluation in Bloom's Taxonomy
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Julia's Maximum Future Consumption from Investment (0, 168)
Marginal Rate of Transformation of Investment into Future Income
An entrepreneur has an opportunity to invest in a new project. The project requires an initial outlay which can be fully financed by borrowing up to $100. For every dollar invested in the project, the entrepreneur will receive $2.50 in future income (a 150% rate of return). On a graph with 'Consumption Now' on the horizontal axis and 'Consumption Later' on the vertical axis, which of the following best represents the endpoints of the new feasible frontier created by this investment opportunity?
Investment Decision Analysis
Interpreting an Investment Opportunity Frontier
An individual can borrow up to a certain limit to finance a project. This investment opportunity creates a new linear feasible frontier of possible 'consumption now' and 'consumption later' combinations. If the rate of return on this project were to increase, while the borrowing limit remained unchanged, this new feasible frontier would shift outward in a parallel fashion.
An individual is considering several investment opportunities. Each opportunity, if taken, creates a new set of possible combinations for consumption now versus consumption later, represented by a straight-line feasible frontier. Match each Marginal Rate of Transformation (MRT), which represents the slope of the frontier, to the description of the investment opportunity it corresponds to.
An individual has an opportunity to borrow up to $56 to fund a project. For every dollar invested in the project, they will receive $3 in future income. This relationship can be represented by a straight-line feasible frontier on a graph of 'consumption now' versus 'consumption later'. If this individual chooses to consume $20 now, the maximum amount they can consume later is $____.
An individual has no current income but has access to a loan that can be used to fund either immediate consumption or a productive investment. Arrange the following steps in the correct logical order to construct the feasible frontier representing all possible combinations of 'consumption now' and 'consumption later'.
Evaluating Competing Investment Opportunities
An individual has an investment opportunity that can be funded entirely by borrowing. This opportunity is represented by a linear feasible frontier on a graph with 'Consumption Now' on the horizontal axis and 'Consumption Later' on the vertical axis. An analyst makes the following claim: 'If the maximum amount you can borrow for this project increases, while the project's rate of return remains constant, the investment itself becomes more profitable.' Which of the following best evaluates this claim?
An entrepreneur has an opportunity to invest in a new project. They can borrow up to $50,000 at an interest rate of 12% to fund the project. For every dollar invested, the project is expected to generate $1.90 in future income. On a graph with 'Consumption Now' on the horizontal axis and 'Consumption Later' on the vertical axis, what is the Marginal Rate of Transformation (the absolute value of the slope) of the new feasible frontier created by this investment opportunity?
Figure 9.13: Julia's Feasible Frontiers for Borrowing and Investment