A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by $2,000 in the first year, $2,500 in the second, and $3,000 in the third and final year of usefulness. The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year.

(a) If the interest rate is 7 percent, what is the present value of the cost savings of purchasing the tractor? Please show your calculations.

(b) Is there any interest rate at which the farmer will decide to buy the tractor. Please explain, without actually calculating present value.

India is a large grower of tea. Assume that because of urban development, land for growing tea decreases, and the government gives large subsidies to tea growers which reduces the cost of growing tea.

(a) Please show on a graph with the demand and supply curves of tea what happens when the land available declines and also give an explanation for the change.

(b) On the same graph you have drawn in (a) (do NOT draw a separate graph for (b)) please show what will happen after the land available decreases when the government gives a subsidy to tea growers and give an explanation for the change.

(c) What is the net impact on the equilibrium price of tea of the changes in (a) and (b)? Please give an explanation.

Assume that the demand for plastic surgery is price inelastic. Please explain whether the following statements are true or false. You must give an explanation in each case.

(a) When the price of plastic surgery increases, the number of operations will decrease.

(b) The percent change in the price of plastic surgery is less than the percent change in quantity

demanded.

(c) If price of plastic surgery is decreased, the expenditure on plastic surgery by the public will

rise.

(d) A plastic surgeon will reduce the price of surgery he performs in order to increase his

income.

If Julie prefers Diet Coke to Diet Pepsi and Diet Pepsi to regular Pepsi but is indifferent between Diet Coke and Classic Coke, what are her preferences between Classic coke and regular Pepsi (which one does she prefer)? Please give an explanation.