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Suppose an investor has an initial endowment equal to $20,000. The interest rate is 20%. The investment opportunity curve is determined by the following function:
Suppose an investor has an initial endowment equal to $20,000. The interest rate is 20%. The investment opportunity curve is determined by the following function: c1=g(c0)=240(20,000c0)0.5. The average indifference curve is determined by the following equation: U(c0,c1)=f(c0,c1)=c0c1. 2.1 Calculate the optimal consumption and investment decision by explaining every step you follow in detail. (25%) 2.2 What is the optimal financing decision for this investor? Discuss the economic implications of financing and whether investment and financing decisions are independent? (25\%) Suppose an investor has an initial endowment equal to $20,000. The interest rate is 20%. The investment opportunity curve is determined by the following function: c1=g(c0)=240(20,000c0)0.5. The average indifference curve is determined by the following equation: U(c0,c1)=f(c0,c1)=c0c1. 2.1 Calculate the optimal consumption and investment decision by explaining every step you follow in detail. (25%) 2.2 What is the optimal financing decision for this investor? Discuss the economic implications of financing and whether investment and financing decisions are independent? (25\%)
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