int rate=10% or 0.1 o O Marginal Investme Investment |K1 0 $14,86 $0,50 $0,50 $14,36 1 0,5 $13,86 1,5 0,5 $13,36 2 0,5 $12,86 2,5 0,5 $12,36 3 0,5 $11,86 3,5 0,5 $11,36 4 0,5 $10,86 4,5 0,5 $10,36 5 0,5 $9,86 5,5 0,5 $9,36 6 0,5 $8,86 MV1=pre vious wealth ($14.860 initially) Excess + PV of return of Excess K2 marginal Return (return Marginal investme on on return on Marginal nt in marginal producti return on producti return on producti investme on) market on market on nt 0 0 0 0 0 $14,86 $3,85 $0,55 $3,85 $0,55 $3,30 $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 2 4 5 i 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 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. 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 int rate=10% or 0.1 o O Marginal Investme Investment |K1 0 $14,86 $0,50 $0,50 $14,36 1 0,5 $13,86 1,5 0,5 $13,36 2 0,5 $12,86 2,5 0,5 $12,36 3 0,5 $11,86 3,5 0,5 $11,36 4 0,5 $10,86 4,5 0,5 $10,36 5 0,5 $9,86 5,5 0,5 $9,36 6 0,5 $8,86 MV1=pre vious wealth ($14.860 initially) Excess + PV of return of Excess K2 marginal Return (return Marginal investme on on return on Marginal nt in marginal producti return on producti return on producti investme on) market on market on nt 0 0 0 0 0 $14,86 $3,85 $0,55 $3,85 $0,55 $3,30 $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 2 4 5 i 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 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. 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