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Author Question: When you were born, your parents deposited 10,000 in the bank. The bank offers a fixed interest rate ... (Read 149 times)

ashley

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on: Jun 29, 2018
When you were born, your parents deposited 10,000 in the bank. The bank offers a fixed interest rate of 4 percent. On your eighteenth birthday, your parents decide to withdraw the money that they deposited to pay for your college tuition.
 
  How much money can they expect to withdraw? Assume that interest is compounded annually.

Question 2

Assume the properties of normal indifference curves. Where will a consumer maximize their utility?
 
  What will be an ideal response?


mk6555

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Reply #1 on: Jun 29, 2018
Answer to Question 1

To calculate the amount of money that can be withdrawn at the end of 18 years, the compound interest formula can be used here. The compound interest formula calculates the future value of an investment with interest rate r until the final withdrawal in year T.In this problem, r is 4, the initial investment is 10,000, and T is 18
The amount in the bank after T years = future value = (1 + r)T  (original principal)
= (1 + 0.04)18  10,000
= 2.0258  10,000
= 20,258

Answer to Question 2

The consumer will maximize their utility where the indifference curve is just tangent to the budget constraint.


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