(a) Describe briefly the theor y underlying Hicks’s economic model of income and capital. What are its practical limitations?

(b) Spock purchased a space invader enter tainment machine at the beginning of year one for £1,000.

He expects to receive at annual inter vals 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 retur n 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.