Question 1:
(a) Suppose Bertha buys a bungalow for $250,000. She expects she can either rent it out at $2,000/month, or with $15,000 invested in improvements, she expects to sell it for $305,000. What is Bertha's expected rate of return in each scenario.
(b) Suppose you are faced with two options. Option A has a probability of 0.75 of earning 14% and a probability of 0.25 of earning 4%. Option B has a probability of 0.55 of earning 13% and a probability of 0.45 of earning 8%. Both options have a beta value of 1.25. Which option is an investor more likely to choose?
Question 2:
(a) Describe three ways that the division of labour contributes to society''s output.
(b) Explain this quote from Adam Smith: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest."
(c) What is the relationship between businesses and households in the circular flow model?