Farmer Biwei has two long-term investment opportunities: Invest in 100 apples and harvest 5 apples per year. Or, invest in 100 bananas and harvest 10 bananas per year.

1. 1)Which are the real rates of returns on apples and bananas, respectively?
2. 2)Suppose the current prices of apples and bananas are the same $1 per unit, which asset should the
3. farmer invest in? Should the farmer always invest more in the asset with a higher rate of return?
4. 3)Suppose the apple price is $1 each and banana price is $0.4 each. What is the nominal return on
5. apples? on bananas?
6. 4)Suppose the apple price remains the same at $1 but the banana price drops from $1 to $0.4. Which
7. product should farmer Biwei invest in if he has perfect foresight? Should he always invest more
8. in the asset with a higher real rate of return?
9. 5)What is the different between real rate of return and nominal rate of return? Which matters in
10. investment decisions?