What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount
of labor necessary to produce steamed milk, which is used to make lattés, and scientists discovered that coffee prevents heart attacks?a. Both the equilibrium price and quantity would increase.b. Both the equilibrium price and quantity would decrease.c. The equilibrium price would increase, and the effect on equilibrium quantity would be ambiguous.d. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.
1 answer:
Answer:
.d. The equilibrium quantity would increase, and the effect on equilibrium price would be ambiguous.
Explanation:
The use of the machine would increase the supply of lattes and price falls. The supply curve would shift to the right. If scientists discover that coffees reduce heart attack, the demand for coffee would increase and price would increase. The demand curve would shift to the right.
The combined effect would be a rise in equilibrium quantity and an indeterminate effect on equilibrium price.
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Solution :
Given :
The bonds offer a of 4.5% per year
Tax rate = 10% = 0.10
Inflation rate = 2
=
+
= 2 + 4.5
= 6.5
=
=
= 5.85
After tax real interest rate = -
= 5.85 - 2.0
= 3.85
= 7.0
=
+
= 7 + 4.5
= 11.5
=
= 10.35
= 11.5 x (1 - 0.10)
= 11.5 x 0.90
= 10.35
=
-
= 10.35 - 7.0
= 3.35
Putting all the value in table :
Real interest Nominal interest After tax nominal After tax
rate rate interest rate interest rate
2.0 4.5 6.5 5.85 3.85
7.0 4.5 11.5 10.35 3.35
Comparing with the , a
will increase the after after tax real interest rate when the government taxes nominal interest income. This tends to encourage saving, thereby increase the quantity of investment in the economy and the increase the economy's long-run growth rate.