Question
Suppose that you consider the consumption preferences of an investor with initial endowment equal to 25,000$. The preferences of this investor are characterized by the
Suppose that you consider the consumption preferences of an investor with initial endowment equal to 25,000$. The preferences of this investor are characterized by the following indifference curve: U=C0xC1
the slope of which is equal to: dc1/dc0= -c1/c0.
Moreover, the available investment opportunity set is expressed through the following equation:C1= g(C0)= 220x(25000-Co)^1/2
The risk-free interest rate is equal to 12%.
Which is the optimal consumption, investing and financing decision?
What are the implications of the existence of the risk-free interest rate on investors' portfolio choices? Please explain in detail your answer.
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Macroeconomics Principles Applications And Tools
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
7th Edition
978-0134089034, 9780134062754, 134089030, 134062752, 978-0132555234
