The Costs of Production
Productivity, population, preferences, or prices could be variables explaining large variations in living standards around the world, but out of these variables, this one is the most significant.
What is Productivity?
Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high.
Because of the differences in tax treatment and credit risk, this bond should have the higher interest rate.
What is Corporate bond?
This is the term used when no legal barriers prevent a firm from entering an industry.
What is Free Entry?
An associate professor of physics gets a $200 a month raise. With her new monthly salary, she can buy more goods and services than she could buy last year.
Her real salary has gone this direction, and her nominal salary has gone this direction.
What is Up in both cases?
Janelle wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Janelle currently has $500,000 in the bank earning 3 percent interest per year.
Suppose Janelle purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent.
This is Janelle's annual opportunity cost of purchasing the factory.
What is $18,000?