Need help with Q2(a)

TOPIC 1: THE FISHER MODEL With an initial endowment of 400 in 1 = 0, an investor can invest in the following not mutually-exclusive and divisiable investment projects 1 B Cashflow at t=0 Cashflow at t= 1 -250 260 -50 100 -100 130 1. Assume for now that there is no capital market. (a) Rank these projects by their returns in descending order and draw the trans- formation curve T)in a Co-graph. (b) Show graphically that the optimal investment program is not independent of the consumption preferences of the investors. 2. Assume that there is a perfect and complete capital market and that investors can invest and borrow money at a unique interest rate of 15%. (a) Draw the the new transformation curve Ts and show how the introduction of the capital market extends the set of feasible consumption allocations. What is the slope of TM? 2 3 TOPIC 1: THE FISHER MODEL With an initial endowment of 400 in 1 = 0, an investor can invest in the following not mutually-exclusive and divisiable investment projects 1 B Cashflow at t=0 Cashflow at t= 1 -250 260 -50 100 -100 130 1. Assume for now that there is no capital market. (a) Rank these projects by their returns in descending order and draw the trans- formation curve T)in a Co-graph. (b) Show graphically that the optimal investment program is not independent of the consumption preferences of the investors. 2. Assume that there is a perfect and complete capital market and that investors can invest and borrow money at a unique interest rate of 15%. (a) Draw the the new transformation curve Ts and show how the introduction of the capital market extends the set of feasible consumption allocations. What is the slope of TM? 2 3