Author Question: Suppose that you and two friends have an opportunity to purchase a pizza restaurant. Each of you ... (Read 52 times)

Mr. Wonderful · **on:** Jun 29, 2018

Suppose that you and two friends have an opportunity to purchase a pizza restaurant. Each of you would put up 75,000 . The revenue from the restaurant is expected to remain 200,000 per year for the next several years.

The costs (not including the opportunity costs of your investment) of operating the restaurant are expected to remain steady at 185,000 for the next several years. The current market rate of interest is 7 percent per year. Should you go in on this deal? Explain.

Question 2

According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest?

A) when inflation is high and stable B) when inflation is moderate but stable
C) when inflation is high and unstable D) when inflation is low

lgoldst9 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The expected profit from the restaurant is 15,000 per year. If the profits are divided equally among the three partners, this amounts to 5,000 per year. This is a 6.67 percent rate of return on the initial 75,000 investment. Since the expected rate of return is less than the market rate of interest, you should not go in on the deal.

Answer to Question 2

C