2.(10 points) 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.

3. (10 points) 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.