Gold Mine Pit Savings Association finds that it can attract the following amounts of deposits if it offers new depositors and those rolling over their maturing CDs the interest rates indicated below: Expected Volume of New Deposits $10 million 15 million 20 million 26 million 286 million Rate of

Question

Gold Mine Pit Savings Association finds that it can attract the following amounts of deposits if it offers new depositors and those rolling over their maturing CDs the interest rates indicated below:

Expected Volume	Rate of Interest
of New Deposits	Offered Depositors
$10 million	3.00%
15 million	3.25
20 million	3.5
26 million	3.75
28 million	4

Management anticipates being able to invest any new deposits raised in loans yielding 6.25 percent. How far should this thrift institution go in raising its deposit interest rate in order to maximize total profits (excluding interest costs)?

Accepted Answer

Expected	Rate	Total	Marginal	Marginal	Marginal	Exp. Diff. In	Total
Inflows	Offered on	Interest	Interest	Cost Rate	Revenue	Marg. Rev	Profits
	New	Cost	Cost		Rate	and Cost	Earned
	Funds
$10	3.00%	0.3	0.3	3.00%	6.25%	3.25%	$0.3250
15	3.25	0.4875	0.1875	3.75	6.25	2.5	$0.4500
20	3.5	0.7	0.2125	4.25	6.25	2	$0.5500
26	3.75	0.975	0.275	4.583	6.25	1.667	$0.6500
28	4	1.12	0.145	7.25	6.25	-1	$0.6300

Gold Mine Pit Savings Association should raise its deposit rate to 3.75%, attracting $26 million in new deposits; because up to that point the marginal revenue rate is greater than the marginal cost rate and total profits are also rising. At 4.0%, the marginal cost rate is greater than the marginal revenue rate and total profits have fallen from a high of $0.65 million back down to $0.63 million.

Question 12.P.4: Gold Mine Pit Savings Association finds that it can attract ...

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