Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question 3 Suppose that Mr X has a useless tree growing in his yard that has become too large, and he must cut it down
Question 3 Suppose that Mr X has a useless tree growing in his yard that has become too large, and he must cut it down within the next four years. Cutting down the tree requires effort, and he would like to wait and cut down the tree later. However, each year that he delays, the tree gets bigger and requires even more effort to cut down. Specifically, suppose that the effort cost to cut down the tree in year T is c(7 ), where c(1) - 10, c(2) = 12, c(3) = 16, and c(4) = 24. Suppose that Mr. X is an exponential discounter with discount factor o, and that the only utility consequence of cutting down the tree is the disutility of effort experienced when the tree is cut. (a) From a year-1 perspective, as a function of o, when is Mr. X's preferred time to cut down the tree? (b) Suppose Mr. X does not cut down the tree in year 1. From a year-2 perspective, as a function of 6, when is Mr. X's preferred time to cut down the tree? Is there any o for which Mr. X's year-2 preferences differ from his year-1 preferences
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started