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In this question assume all dollar units are real dollars in billion; for example, $250 means $250 billion. It is year 0. Mexico thinks it can find $250 of domestic investment projects with a marginal product of capital (MPK) equal to 15%. Mexico now invests $200 in year O by borrowing $200 from the rest of the world at a world real interest rate r* of 10%. There is no further borrowing or investment after this. Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0. Assume G = 0 always; and assumel =0 except in year 0. Also, assume NUT = KA - 0 and that there is no net labor income so NFIA - w. The projects start to pay off in year 1 and continue to pay off all years thereafter. Interest is paid in perpetuity, in year1 and every year thereafter. In addition, assume that if the projects are not done, then GDP-Q-C- $200 in all years, so that PV(Q) = PV(C) - 200 + 200/0.10 -2,200. %3! a. Should Mexico fund the $200 worth of projects? Explain your answer. b. Why might Mexico be able to borrow only $200 and not $250?

In this question assume all dollar units are real dollars in billion; for example, $250 means $250 billion. It is year 0. Mexico thinks it can find $250 of domestic investment projects with a marginal product of capital (MPK) equal to 15%. Mexico now invests $200 in year O by borrowing $200 from the rest of the world at a world real interest rate r* of 10%. There is no further borrowing or investment after this. Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0. Assume G = 0 always; and assumel =0 except in year 0. Also, assume NUT = KA - 0 and that there is no net labor income so NFIA - w. The projects start to pay off in year 1 and continue to pay off all years thereafter. Interest is paid in perpetuity, in year1 and every year thereafter. In addition, assume that if the projects are not done, then GDP-Q-C- $200 in all years, so that PV(Q) = PV(C) - 200 + 200/0.10 -2,200. %3! a. Should Mexico fund the $200 worth of projects? Explain your answer. b. Why might Mexico be able to borrow only $200 and not $250?

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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In this question assume all dollar units are real dollars in billion; for example, $250 means $250 billion. It is year 0. Mexico thinks it can find $250 of domestic investment projects with a marginal product of capital (MPK) equal to 15%. Mexico now invests $200 in year O by borrowing $200 from the rest of the world at a world real interest rate r* of 10%. There is no further borrowing or investment after this. Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0. Assume G = 0 always; and assumel =0 except in year 0. Also, assume NUT = KA - 0 and that there is no net labor income so NFIA - w. The projects start to pay off in year 1 and continue to pay off all years thereafter. Interest is paid in perpetuity, in year 1 and every year thereafter. In addition, assume that if the projects are not done, then GDP-Q-C- $200 in all years, so that PV(Q) = PV(C) - 200 + 200/0.10 - 2,200. a. Should Mexico fund the $200 worth of projects? Explain your answer. b. Why might Mexico be able to borrow only $200 and not $250?
Transcribed Image Text:In this question assume all dollar units are real dollars in billion; for example, $250 means $250 billion. It is year 0. Mexico thinks it can find $250 of domestic investment projects with a marginal product of capital (MPK) equal to 15%. Mexico now invests $200 in year O by borrowing $200 from the rest of the world at a world real interest rate r* of 10%. There is no further borrowing or investment after this. Use the standard assumptions: Assume initial external wealth W (W in year -1) is 0. Assume G = 0 always; and assumel =0 except in year 0. Also, assume NUT = KA - 0 and that there is no net labor income so NFIA - w. The projects start to pay off in year 1 and continue to pay off all years thereafter. Interest is paid in perpetuity, in year 1 and every year thereafter. In addition, assume that if the projects are not done, then GDP-Q-C- $200 in all years, so that PV(Q) = PV(C) - 200 + 200/0.10 - 2,200. a. Should Mexico fund the $200 worth of projects? Explain your answer. b. Why might Mexico be able to borrow only $200 and not $250?
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