Home assignment no 4 (25 pts) Michael has the opportunity to buy a real estate for $150 000 which he expects to be able to sell at $200 000 next period. Lets assume for simplicity that he lives for only two periods: young and old. His income when young is $200 000 and $100 000 when old. Michael can borrow and lend at a 7% interest rate per period.

a) What is the NPV of this investment opportunity? Plot Michaels budget constraint with and without investment

b) If Michael buys the property what is the effect on his present consumption if he keeps all future consumption unchanged

c) What financial transactions are necessary to achieve this

d) What is the maximum price Michael is willing to pay for the real estate?

e) Should Michael buy the land?