Preguntas ITAM 1
Preguntas ITAM 1
Economics
Open questions
The Human Capital Theory suggests that individuals invest in education when the
present value of the investment is positive, therefore comparing the present value
of the associated costs and benefits.
Let’s suppose that Julia just finished High School. She must choose between three
alternative career paths. There are only three periods of (working or studying) life
after high school, for simplicity reasons. The three choices Julia faces are the
following:
Suppose the interest rate per period is set at 10%. Answer the following questions:
(a) (10 rp) Which of the three choices is best in terms of economic benefits for
Julia?
(b) (10 rp) If Julia has a passion for Philosophy and always wanted to get a DPhil
in that subject, will she have to sacrifice consumption to follow this career
path? If yes, what is the present value of consumption she will have to
sacrifice?
(c) (10 rp) Should the State finance tuition for Philosophy studies? Justify your
answer.
1
Aghion, Philippe, et al. "Competition and innovation: An inverted-U relationship." The Quarterly
Journal of Economics 120.2 (2005): 701-728.
IEO 2023 Economics Open Questions ecolymp.org 2
Open Question 5. Internal Rate of return
In case you forgot the formula:
! !%# − !
! ! + ! !"# + ! !"$ +. . . +! =
!−1
Let P0, P1, P2, …, Pk be a future payment flow. This means that at the time instant 0
we pay P0, at the time instant 1, we pay P1 and so on. If a payment is negative, usually
P0, this means that we receive money instead of paying.
The Net Present Value of this flow, denoted by NPV(r), is defined as the sum of all
present values of the above payments, for a given interest rate r. The rate r is the
rate which is applied at each time instant. To find the Internal Rate of Return (IRR)
of this flow, we follow the next steps:
A company takes, at the ”zero” time instant, a loan equal to 71 money units and
plans to pay the first month 15 money units, the second 28 and the third 30, that is
P1 = 15, P2 = 28, P3 = 30
(a) (10 rp) Using the above procedure calculate the IRR for this payment flow. Use
r0 = 0.14, applied annually, and increase it with step h = 0.01 up to the value r = 0.16.
(b) (10 rp) If the company, instead of following this payment policy, decides to give
25 money units on the third month and some amount of money the fifth month,
what should this amount be, in order the whole loan to be repaid? As an annual
interest rate, use the IRR we found before.
(c) (10 rp) The company has started to repay the loan by 5 equal monthly payments,
covering both principal and interest and with an interest rate equal to the IRR,
found before. Suddenly after the second payment, the interest rate is increased by
3%. The government, in order to help, decides to cover the 25% of the loan which
has not been paid yet and to extend the number of total payments from 5 to 8. Find
the amount of each equal monthly payment, the company must pay from now on,
to repay the loan.