Answer to Question #249229 in Macroeconomics for Biba

Question

8. 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 first three columns of ( J, 10, 70)
d. A 50 percent tax on net profi ts shown in columns (6) and (7)

Answer 1

a) Doubling yearly revenues per $1,000 tends to enhance income by shifting the investment demand function to the right. When yearly revenue increases by a factor of two, annual net profit increases by the same factor to assure project profitability.

b). As interest rates rise, 15 percent more revenue is lost, resulting in a 15 million dollar reduction in investment demand as compared to a 10% interest rate, causing the investment demand function to move to the left.

c) 9th project has been reduced due to losses. The project will not be able to assist in the accumulation of a net yearly return on the respective rate of interest (10 percent .) However, a 5% interest rate may result in a net yearly profit.

d) 50 percent net income tax may result in lower net profit, lowering overall revenue and moving the investment demand function to the left.