An investor who makes optimal use of a given information set in forming expectations about an asset price will expend resources to evaluate the information contained in that information set up to the level of expenditures at which the improvement in the accuracy of their expectation (or forecast) if they spend one more unit of resources is greater than the opportunity costs of expending one additional unit of resources to evaluate this information. O True O False

An investor who makes optimal use of a given information set in forming expectations about an asset price will expend resources to evaluate the information contained in that information set up to the level of expenditures at which the improvement in the accuracy of their expectation (or forecast) if they spend one more unit of resources is greater than the opportunity costs of expending one additional unit of resources to evaluate this information. O True O False

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Compare and contrastadaptive expectations and rationalexpectations.
Refer to the figure below: +16 +12 +8 Consumption Investment is more volatile than consumption. -12 Investment 16 -20 -24 1 2 3 41 2000 2 3 4 1 2 3 4 1 2 3 41 2 3 41 2003 2 3 4 1 2 3 41 2 3 4 1 2 3 4 2007 2001 2002 2004 2005 2006 2008 CALENDAR QUARTER Instructions: Enter your responses as a percent rounded to the nearest whole number. What was the range, in absolute value of percentage change, of the variation in quarterly growth rates between 2001 Q1 and 2003 Q4 of a. Consumer spending? % b. Investment spending? % CHANGE FROM PRIOR QUARTER (porcent)
Hi there, I need help solving a problem and am unsure how to go about solving the question. It is a practive question from a textbook and am trying to understand it further. I need a bit more help solving 1 a) and b). I have already obtained the values of the expected return at t = 0 and the expected utilities at t = 0 for both scenarios (direct investing) and (depositing with the bank). Thanks Here is the question: Consider the basic setup of the Diamond-Dybvig (1983) model. Specifically, thereare three periods, denoted t = 0, 1, 2, a single consumption good, and an illiquidinvestment opportunity that pays gross return 1.1 if liquidated at t = 1, or grossreturn 2.2 if liquidated at t = 2. There are 30 people in the economy, each endowed with 1 unit of the consumptiongood at t = 0. At t = 1, exactly 11 will randomly realize that they need to consumeat t = 1 (the early consumers), the remaining 19 people will need to consume at t = 2(the late consumers). The utility derived from…
Match the contribution with the appropriate scholar. Who believed that framing the general equilibrium of the entire microeconomy is better treated one market at a time? v Choose... Modigliani Who is considered the father of Modern Portfolio Theory? Marshall Fisher Who demonstrated why people are either savers or dissavers? Keynes Who provided a general existence proof of a competitive equilibrium? Markowitz Ricardo Who developed the distinction between comparative and absolute advantage? Arrow Hotelling Who first developed a working model of options pricing? Bachelier Smith Who argued that competition in physical space can result in minimum differentiation? Choose... Who determined that, unlike the neoclassical microeconomic theory of equilibrium, we may be in a state of persistent Choose... disequilibrium in the macroeconomy? Who considered the regard by others as an important driver of human behavior? Choose... Who developed a complete Life Cycle Model of spending and saving…
Consider the infinite horizon RBC model with uncertainty developed in class where the representative consumer and firm are assumed to have rational expectations. The consumer has following expected lifetime utility: Eo B¹ {log (C₂) +nlog(1)} ŋ>0, and ß € (0,1), t=0 wher C, is consumption and 1, is leisure. The consumer's lifetime budget constraint looks like: Ct › wt (h − lt) + IIt − It ==0(1+rs) t=0 II's=0(1+rs) Σ + So where h> 0 denotes total hours available for either work or leisure; w, is the wage rate; II, denotes the dividend/profit payments; T, denotes lump-sum taxes; r is the interest rate and So 20 denotes the initial savings. Show that the consumer's Euler equation-i.e., the optimal choice of consumption today versus consumption tomorrow-takes the following from: } = BE: {C+7(1+7+4+1)}. (Hint: take the F.O.C. w.r.t. C, and isolate E,{A}. Next, take the F.O.C. w.r.t. C++1 and isolate Et+1{A} then take the expectation of this expression at time t and note that E+E++1{A} = E{A}…
Provide one example of an investment option for households. Then, analyze this option based on its liquidity, risk and expected rate of return (is it moderate, high or low?). Be sure to provide s short explanation for each.
Then what of part d, e and f?
A decision maker allocates an endowment of W > 0 dollars across two periodst = 1, 2. He discounts the future by β ∈ (0, 1) while facing a gross interest rateof R > 1. His utility is the same as studied in class. Solve for the intertemporalchoice problem. Show that the optimal consumption is decreasing over time ifβR < 1, constant over time if βR = 1, and increasing over time if βR > 1.
Suppose that for a particular economy, there are only RM 5 billion worth of investment projects that can yield expected real returns of 9.1% to 12%, but none that can yield more than 12%. An additional RM 5 billion will yield expected real returns of 6.1% to 9%, an additional RM 5 billion will yield expected real returns of 3.1% to 6%, and an additional RM 5 billion will yield expected real returns of 0% to 3%. If the real rate of interest is 6%, desired investment spending will be: * Your answer
A firm goes to the markets to raise capital. The investor can either invest V₁ on the firm or buy government bonds. If she invests, the expected value of the dividend she receives the following period is Et[Dt+1]. Where Et[] denotes the mathematical expectation, taken at time, t. If she buys a government bond, and receive a gross return (1 + r) for sure. 1. Let Et [Vt+1] denote the expected value of the stock the following period, explain why this is not the only return that the investor can expect from owning the stock. 2. Write down an expression for the gross return on the stock. [Hint: This is a ratio.] 3. Suppose investor's objective is to maximize their expected return. If the return from bonds is higher than the expected return from stocks, will they buy stocks or bonds? How about the other way around? 4. Since investors hold both stocks and bonds, what must be true about the expected return of stocks and bonds in equilibrium? Show that this implies the following no arbitrage…
A decision maker allocates an endowment of W > 0 dollars across two periodst = 1, 2. He discounts the future by β ∈ (0, 1) while facing a gross interest rateof R > 1. His utility is the same as studied in class. Solve for the intertemporalchoice problem. Show that the optimal consumption is decreasing over time ifβR < 1, constant over time if βR = 1, and increasing over time if βR > 1.
Indicate whether the statement is true or false, and justify your answer.The internal rate of return is defined as the interest rate that makes the net present value of an investment stream exactly equal to zero.