Answer:
Future value = 16007.81437
Explanation:
we have to compound all the rates for the time period together as the 7,750 as exposed to this rate and their interest generated in one period are taking into consideration for the subsequent period interest calculations.
We multiply them and get the future value factor:
we now can solve for future value:
Future value = 16007.81437
The complete question is as follows:
Dan owns an autographed copy of a Brittany Spears CD that he values at $100. If he sells the CD at the garage sale he’s planning to hold in a few weeks, it will be sold to a buyer with a reservation price of $175. If he sells it on eBay, it will be sold to a buyer with a reservation price of $500. eBay will charge Dan $50 to auction the CD, which just covers eBay’s opportunity cost of running the auction. Relative to selling the CD at his garage sale, auctioning the CD on eBay will lead:
A. to no change in total economic surplus.
B. total economic surplus to increase by $500.
C. total economic surplus to increase by $275.
D. total economic surplus to increase by $100.
Answer: C - Total economic surplus to increase by $275.
In this question, we only need to consider producers' surplus since we're considering the various options for Dan to sell his CD.
We calculate Producer's Surplus as follows:
Economic costs not only refers to explicit costs like cost of the CD, but also includes opportunity costs. Since we need to calculate producer's surplus when Dan sells on Ebay, we need to consider the following costs:
Value of the CD = $100
Ebay's opportunity cost that Dan will have to bear = $50
Among the three expenses listed above, the profit Dan would've got in the garage sale is considered the <u>implicit cost or opportunity cost.</u>
Substituting the values we have in the equation above, we get,