MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 8, Problem 2TY
To determine
To describe: The act which can be defined as Investment from an Economist point of view.
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John and Peter are two representative consumers/investors who maximize the utility of consumption. John's utility of consumption is characterized as
ln(x) + 2ln(y)
while Peter puts more weight on the current consumption level and has a utility function of 2ln(x) + ln(y).
John has a wealth of ($10, $20) thousand, while Peter has a wealth of ($20, $15) thousand now and next year, respectively.
(a) What are the optimal consumption plans forJohn and Peter,respectively,if the interest rate is 5% per annum? (b) If John and Peter are the only investors/consumers, what is the equilibrium interest rate?
(c) Further to part (b), how much do they borrow or lend to each other?
Anna's investment is worth $2.5 million
(decreased from $3.5 to $2.5 million) Elsa's
investment is worth $2.2 million (increased
from $2 to $2.2 million) For each of them write
down the reference utility function (First
determine the reference point (use a
parameter) and derive reference utility
function for each).
Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 30 percent.
Additional information. Problem 5 states determine which of two investment projects a manager should choose if the discount rate of the firm is 10 percent. The first project promises a profit of $100,000 in each of the next four years, while the second project promises a profit of $75,000 in each of the next six years.
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