Author Question: Lucinda is deciding whether to enroll in an art school or a culinary school. The art school will ... (Read 103 times)

torybrooks · **on:** Jun 29, 2018

Lucinda is deciding whether to enroll in an art school or a culinary school. The art school will cost 38,000 and the culinary school will cost 52,000.

Lucinda estimates that the benefits from attending the art school will be 75,000 and the benefits from attending the culinary school will be 88,000. Based on these numbers, in which school should Lucinda enroll?

Question 2

When the Fed lowers the federal funds rate and the real interest rate falls, what happens to the opportunity cost of investment? What happens to investment?

What will be an ideal response?

Mochi · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The net benefit from attending the art school is 75,000 - 38,000 = 37,000. The net benefit from attending the culinary school is 88,000 - 52,000 = 36,000. So, even though the total benefit is greater from attending the culinary school, the net benefit is greater from attending the art school, so she should attend the art school.

Answer to Question 2

The opportunity cost of investment is the real interest rate. When the Fed lowers the federal rate so that the real interest rate falls, the opportunity cost of investment decreases. In response, investment increases.