Namin's output has been constant at P every year. In year 0, it finds an investment project that will increase its output by 0.0SP cach year, from year 2 onwards. It can borrow frum the Shire st an interest rate of just 4% a ycar (hobbits are very nice people), but any borowing 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 f. so that the investment is worthwhile? b. You're Namia's Treasurer. Assuming that the project's actual cost is AK = 0.89, devise a consumption-smoothing plan for Narmia by borrowing from the Shire, so that Narnia can take advantage of the investment project while maintaining a snooth consumption path.
Namin's output has been constant at P every year. In year 0, it finds an investment project that will increase its output by 0.0SP cach year, from year 2 onwards. It can borrow frum the Shire st an interest rate of just 4% a ycar (hobbits are very nice people), but any borowing 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 f. so that the investment is worthwhile? b. You're Namia's Treasurer. Assuming that the project's actual cost is AK = 0.89, devise a consumption-smoothing plan for Narmia by borrowing from the Shire, so that Narnia can take advantage of the investment project while maintaining a snooth consumption path.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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