$*$ Question $2$

$($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.

$56$ Income and asset value measurement systems

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The present value of $1$ receivable at the end of a period discounted at $10\%$ is as follows:

End of year one $0\mathrm{.}909$

End of year two $0\mathrm{.}826$

End of year three $0\mathrm{.}751$

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.