1). Refer to our analysis of the optimal investment decision of the firm in chapter 11. Specifically, we learned in class that firms will aim to maximise profits in each period by producing up to the point where MC(I) = MB(1). When this condition is met, the firms optimal investment decision is guided by MB(I) = MPk +1- 6 - MPK - 8= r, if MB = 1 1+r That is one unit of additional investment in the current period implies an additional MPk of future production plus the remaining capital stock in period two (1 - S) Now suppose instead we assume that any capital firms have remaining at the end of future period can be sold at price PK. A) State the Optimal decision rule of the firm under the above scenario and explain how this change affects the optimal investment rule of the firm B) Suppose that we interpret PK as the firms stock price. If Pp rises what effect does this have on the firm's investment schedule? Draw a graph to show the effect C) What does your answer in B above imply about the relationship between investment expenditures and stock prices