Finacial Econ

4. Draw a line of equal present values for the cash flow profile of $100 now and $210 next period, interest rates at 5%. What is the maximum amount that can be realized in the first period if, in addition to interest charges, 1% commission is collected from the proceeds of any borrowings? Show the effect of the commission on your graph, and explain the importance of this exercise for the consumer’s well-being.

5. Suppose interest rates are zero and the consumer’s utility is u(c1,c2)=(c1,c2), while the two incomes are (y1, y2)= (75, 125). Find the optimal consumption in each period, and also indicate what financial transactions the consumer makes. Show the answers on a diagram.

10. A consumer’s consumption-utility function for a two-period horizon is u(c1, c2)= c1c2^0.6; the income stream is y1= 2,000; y2= 1,296; and the market rate of interest is 0.08. Determine values for c1 and c2 that maximize utility. Is the consumer a borrower or a lender?

11. In a two-period problem, a consumer whose preferences satisfy the assumptions of this chapter will consume more of at least one good as income rises. True or false? Show diagrammatically why your answer is correct.

12. Show diagrammatically how an individual earning income at time 1 could provide for consumption at time 2, where time 2 represents retirement and no income is earned.

CH. 9

18. a. What is meant by agency theory?

b. Give two examples where agency theory is applied?

6. Charlie Brown’s utility function is 50w 2 w2; his current wealth w, measured in cents, is zero. Lucy has a penny and wants Charlie to take the following bet:

Charlie will owe Lucy 2 if the penny is tossed and comes up heads. Lucy will give Charlie the penny and owe him another if it comes up tails.

a. Should Charlie Brown take the bet? Why, or why not?

b. Draw a diagram, and show your calculations.

c. Lucy, exasperated by her failure to persuade Charlie to take the bet she proposed in above, is wondering if he is more daring...