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$3,30 Marginal Investment Investment K1 0 0 $0,50 $0,50 1 0,5 1,5 0,5 2 0,5 2,5 0,5 3 0,5 3,5 0,5 4 0,5 4,5 0,5

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$3,30 Marginal Investment Investment K1 0 0 $0,50 $0,50 1 0,5 1,5 0,5 2 0,5 2,5 0,5 3 0,5 3,5 0,5 4 0,5 4,5 0,5 5 0,5 5,5 0,5 6 0,5 $14,86 $14,36 $13,86 $13,36 $12,86 $12,36 $11,86 $11,36 $10,86 $10,36 $9,86 $9,36 $8,86 MV1=previous wealth ($14.860 Excess return initially) + PV of Marginal Marginal of marginal Excess Return on K2 (return on return on return on return on investment in marginal production) market production market production investment int rate=10% or 0.1 0 0 0 0 0 $14,86 $3,85 $0,55 $3,85 $0,55 $17,86 $5,38 $1,10 $1,53 $0,55 $0,98 $18,75 $6,52 $1,65 $1,14 $0,55 $0,59 $19,29 $7,46 $2,20 $0,94 $0,55 $0,39 $19,64 $8,26 $2,75 $0,80 $0,55 $0,25 $19,87 $8,96 $3,30 $0,70 $0,55 $0,15 $20,01 $9,59 $3,85 $0,63 $0,55 $0,08 $20,08 $10,15 $4,40 $0,56 $0,55 $0,01 $20,09 $10,66 $4,95 $0,51 $0,55 -$0,04 $20,05 $11,13 $5,50 $0,46 $0,55 -$0,09 $19,97 $11,55 $6,05 $0,42 $0,55 $0,13 $19,86 $11,94 $6,60 $0,39 $0,55 -$0,16 $19,71 In the above "ageing wine" (see Section 3.3) problem, inherited resources = time 1 value of inherited wine equals $14.86 The vintner has also inherited knowledge about the wine ageing technology which is K1^2 + K2^2 = 221 The market interest rate equals 10%. This means any time1 savings can be lent in the capital market and grows by 10% during the year. Similarly any time2 amount has to be discounted by 10% to obtain its current value. Very Briefly explain 5pts Answer the following questions: a) suppose the vintner invests 50 cents only, by how much does her/his wealth increases? suppose the vintner invests a second 50 cents (namely total is 1 but we are focusing on the second 50 cents) b) what is the MARGINAL return of this second 50 cents when invested into ageing wine? c) what is the MARGINAL return of this second 50 cents when invested into lending? d) between (b) and (c) which option will the vintner choose? e) what is the wealth maximizing level of total investment? Very Briefly explain Very Briefly explain Very Briefly explain Very Briefly explain 10 pts 10 pts 10 pts 5 pts Investment Marginal Investment K2 (return return on on market production Marginal Marginal return on return on production market MVI-previ Excess wealth ($14.860 return of initially) + marginal PV of investment Excess in Return on production marginal investment int rate-10% or 0.1 0 0 $0,50 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 $0.50 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 $14,86 S14,36 S13,86 $13,36 $12,86 $12,36 $11,86 S11,36 $10,86 $10,36 $9.86 59,36 $8,86 0 $3,85 $5,38 $6,52 57.46 $8,26 $8.96 $9.59 S10,15 $10.66 SI1,13 S11.55 $11.94 0 S0.55 $1,10 $1.65 S2.20 $2,75 $3,30 $3.85 $4.40 $4.95 S5,50 $6,05 S6,60 0 $3.85 $1,53 S1,14 50,94 50.80 50,70 50,63 50,56 50,51 50,46 50,42 S0,39 0 $0.55 $0.55 S0.55 50,55 $0,55 50,55 S0.55 S0.35 50,55 $0,55 50,55 $0.55 0 $3,30 50,98 $0,59 $0,39 50,25 $0,15 $0,08 $0,01 -50,04 -80,09 -50,13 -S0.16 S14,86 $17.86 $18.75 $19.29 $19.64 $19,87 $20,01 $20.08 $20,09 $20,05 $19.97 $19.86 $19.71 1 In the above ageing wine" (see Section 3.3) problem, inherited resources time I value of inherited wine equals $14.86 The vintner has also inherited knowledge about the wine ageing technology which is Kl^2 + K22 - 221 The market interest rate equals 10%. This means any timel savings can be lent in the capital market and grows by 10% during the year. Similarly any time2 amount has to be discounted by 10% to obtain its current value. Answer the following questions: a) suppose the vintner invests 50 cents only, by how much does her/his wealth increases? Very Briefly explain suppose the vintner invests a second 50 cents (namely total is I but we are focusing on the second 50 cents) b) what is the MARGINAL return of this second 50 cents when invested into ageing wine? Very Briefly explain c) what is the MARGINAL return of this second 50 cents when invested into lending? Very Briefly explain d) between (b) and (c) which option will the vintner choose? Very Briefly explain e) what is the wealth maximizing level of total investment? Very Briefly explain 5pts 10 pts 10 pts 10 pts 5 pts $3,30 Marginal Investment Investment K1 0 0 $0,50 $0,50 1 0,5 1,5 0,5 2 0,5 2,5 0,5 3 0,5 3,5 0,5 4 0,5 4,5 0,5 5 0,5 5,5 0,5 6 0,5 $14,86 $14,36 $13,86 $13,36 $12,86 $12,36 $11,86 $11,36 $10,86 $10,36 $9,86 $9,36 $8,86 MV1=previous wealth ($14.860 Excess return initially) + PV of Marginal Marginal of marginal Excess Return on K2 (return on return on return on return on investment in marginal production) market production market production investment int rate=10% or 0.1 0 0 0 0 0 $14,86 $3,85 $0,55 $3,85 $0,55 $17,86 $5,38 $1,10 $1,53 $0,55 $0,98 $18,75 $6,52 $1,65 $1,14 $0,55 $0,59 $19,29 $7,46 $2,20 $0,94 $0,55 $0,39 $19,64 $8,26 $2,75 $0,80 $0,55 $0,25 $19,87 $8,96 $3,30 $0,70 $0,55 $0,15 $20,01 $9,59 $3,85 $0,63 $0,55 $0,08 $20,08 $10,15 $4,40 $0,56 $0,55 $0,01 $20,09 $10,66 $4,95 $0,51 $0,55 -$0,04 $20,05 $11,13 $5,50 $0,46 $0,55 -$0,09 $19,97 $11,55 $6,05 $0,42 $0,55 $0,13 $19,86 $11,94 $6,60 $0,39 $0,55 -$0,16 $19,71 In the above "ageing wine" (see Section 3.3) problem, inherited resources = time 1 value of inherited wine equals $14.86 The vintner has also inherited knowledge about the wine ageing technology which is K1^2 + K2^2 = 221 The market interest rate equals 10%. This means any time1 savings can be lent in the capital market and grows by 10% during the year. Similarly any time2 amount has to be discounted by 10% to obtain its current value. Very Briefly explain 5pts Answer the following questions: a) suppose the vintner invests 50 cents only, by how much does her/his wealth increases? suppose the vintner invests a second 50 cents (namely total is 1 but we are focusing on the second 50 cents) b) what is the MARGINAL return of this second 50 cents when invested into ageing wine? c) what is the MARGINAL return of this second 50 cents when invested into lending? d) between (b) and (c) which option will the vintner choose? e) what is the wealth maximizing level of total investment? Very Briefly explain Very Briefly explain Very Briefly explain Very Briefly explain 10 pts 10 pts 10 pts 5 pts Investment Marginal Investment K2 (return return on on market production Marginal Marginal return on return on production market MVI-previ Excess wealth ($14.860 return of initially) + marginal PV of investment Excess in Return on production marginal investment int rate-10% or 0.1 0 0 $0,50 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 $0.50 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 $14,86 S14,36 S13,86 $13,36 $12,86 $12,36 $11,86 S11,36 $10,86 $10,36 $9.86 59,36 $8,86 0 $3,85 $5,38 $6,52 57.46 $8,26 $8.96 $9.59 S10,15 $10.66 SI1,13 S11.55 $11.94 0 S0.55 $1,10 $1.65 S2.20 $2,75 $3,30 $3.85 $4.40 $4.95 S5,50 $6,05 S6,60 0 $3.85 $1,53 S1,14 50,94 50.80 50,70 50,63 50,56 50,51 50,46 50,42 S0,39 0 $0.55 $0.55 S0.55 50,55 $0,55 50,55 S0.55 S0.35 50,55 $0,55 50,55 $0.55 0 $3,30 50,98 $0,59 $0,39 50,25 $0,15 $0,08 $0,01 -50,04 -80,09 -50,13 -S0.16 S14,86 $17.86 $18.75 $19.29 $19.64 $19,87 $20,01 $20.08 $20,09 $20,05 $19.97 $19.86 $19.71 1 In the above ageing wine" (see Section 3.3) problem, inherited resources time I value of inherited wine equals $14.86 The vintner has also inherited knowledge about the wine ageing technology which is Kl^2 + K22 - 221 The market interest rate equals 10%. This means any timel savings can be lent in the capital market and grows by 10% during the year. Similarly any time2 amount has to be discounted by 10% to obtain its current value. Answer the following questions: a) suppose the vintner invests 50 cents only, by how much does her/his wealth increases? Very Briefly explain suppose the vintner invests a second 50 cents (namely total is I but we are focusing on the second 50 cents) b) what is the MARGINAL return of this second 50 cents when invested into ageing wine? Very Briefly explain c) what is the MARGINAL return of this second 50 cents when invested into lending? Very Briefly explain d) between (b) and (c) which option will the vintner choose? Very Briefly explain e) what is the wealth maximizing level of total investment? Very Briefly explain 5pts 10 pts 10 pts 10 pts 5 pts

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