(a) Describe briefly the theory underlying Hicks’s economic model of income and capital. What are its practical limitations?
(b) Spock purchased a space invader entertainment machine at the beginning of year one for £1,000. He expects to receive at annual intervals the following receipts: at the end of year one £400; end of year two £500; end of year three £600. At the end of year three he expects to sell the machine for £400.
Spock could receive a return of 10% in the next best investment
The present value of £1 receivable at the end of a period discounted at 10% is as follows:
End of year one .... £0.909
End of year two ... £0.826
End of year three ... £0.751

Required:
Calculate the ideal economic income, ignoring taxation and working to the nearest £.
Your answer should show that Spock’s capital is maintained throughout the period and that his income is constant.