Answer to Question #242007 in Macroeconomics for vie

Question

What would be the effects of the following on the investment demand function illustrated in Table 21-5 and Figure 21-8? a. A doubling of the annual revenues per $1000 invested shown in column (3) b. A rise in interest rates to 15 percent per year c. The addition of a ninth project with data in the fi rst three columns of ( J, 10, 70) d. A 50 percent tax on net profi ts shown in columns (6) and (7) 

Answer 1

a) When annual revenues per $ 1,000 are doubled, this tends to increase income as it shifts investment demand function towards right-side. When the increase in the annual revenue is double, annual net profit similarly increase to ensure profitability within the projects.

b. When the rates of interest increases 15% more income will be reduced, which will also reduce investment demand by 15 million dollars when compared to 10% interest rate, which results to the investment demand function shifting towards left.

c. 9th project which incurred losses reduces investment value. The project cannot help accumulate net annual return on the respective rate of interest (10%.) However, 5% rate of interest may generate net annual profit.

d.50% net income tax may lead to net profit reducing, which will minimize general revenue and making investment demand function shifting towards left-side.