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Answer: 5%.
## Explanation The marginal cost rate represents the cost of raising additional funds, considering both the explicit cost of new funds and the implicit cost of having to pay higher rates on existing funds. **Given:** - Current deposits: $100 million at 2% - Additional deposits needed: $50 million - New rate for all deposits: 3% **Calculation:** 1. **Additional interest cost on existing deposits:** - Current cost: $100 million × 2% = $2 million - New cost: $100 million × 3% = $3 million - Additional cost on existing deposits: $3 million - $2 million = $1 million 2. **Interest cost on new deposits:** - $50 million × 3% = $1.5 million 3. **Total additional cost:** - Additional cost on existing deposits: $1 million - Cost on new deposits: $1.5 million - Total: $2.5 million 4. **Marginal cost rate:** - Total additional cost ÷ Additional funds raised - $2.5 million ÷ $50 million = 5% **Therefore, the marginal cost rate is 5%, which corresponds to option B.** This calculation shows that while the bank is paying 3% explicitly on the new $50 million, it also incurs an additional 1% cost on the existing $100 million, effectively increasing the true marginal cost to 5%.
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A bank currently has $100 million of deposits earning an average rate of 2%. It would like to raise an additional $50 million, but to do so, will have to raise the deposit rate to 3% on both the old and new accounts. What is the marginal cost rate of the additional $50 million in funds?
A
3%.
B
5%.
C
7%.
D
9%.