Question

The following table shows Jay's estimated annual benefits of holding different amounts of money. Average money holdings Total benefit $100 $20 $200 $29 $300 $36 $400 $41 $500 $44 How much money will Jay hold if the nominal interest rate is 6 percent? (Assume he wants his money holdings to be in multiples of $100.)

Multiple Choice $100 $200 $300 $400

Answer 1

Marginal Cost of additional $100 in average holding=100*6%=$6

Average money holding, M	Annual Benefit, TB	Marginal Benefit= MB=Change in TB per $100 change in M	Marginal Cost
100	20		6
200	29	9	6
300	36	7	6
400	41	5	6
500	44	3	6

(All values in $)

Jay will maximize net benefit by selecting the average money holding in such a way that MB>MC or MB=MC.

We observe that MB>MC for M=$300 and MB<MC for M=$400. So,, optimal average holding is $300

Correct option is

$300