Namia's output has been constant at Y every year. In year 0, it finds an investment project that will Q4. increase its output by 0.05Y each year, from year 2 onwards. It can borrow from the Shire at an interest rate of just 4% a year (hobbits are very nice people), but any borrowing is to be paid in perpetuity from year I (perhaps not so nice). a. What is the maximum cost of the project, in terms of Y, so that the investment is worthwhile? b. You're Narnia's Treasurer. Assuming that the project's actual cost is AK = 0.8Y, devise a consumption-smoothing plan for Narnia by borrowing from the Shire, so that Narnia can take advantage of the investment project while maintaining a smooth consumption path. %3D

Namia's output has been constant at Y every year. In year 0, it finds an investment project that will Q4. increase its output by 0.05Y each year, from year 2 onwards. It can borrow from the Shire at an interest rate of just 4% a year (hobbits are very nice people), but any borrowing is to be paid in perpetuity from year I (perhaps not so nice). a. What is the maximum cost of the project, in terms of Y, so that the investment is worthwhile? b. You're Narnia's Treasurer. Assuming that the project's actual cost is AK = 0.8Y, devise a consumption-smoothing plan for Narnia by borrowing from the Shire, so that Narnia can take advantage of the investment project while maintaining a smooth consumption path. %3D

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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