Consider a forward-looking individual who aims at maximizing his expected lifetime utility from his expected lifetime resources due to the presence of uncertainty. Assume the initial endowment of the individual is 4, and his expected labour income is in the sequence 2 Jo... His utility function takes the form U(C.) = aC -C where C, is consumption in period and 8 > 0. Assume the real interest rate, is constant but not necessarily equal to the discount rate p. Suppose that this individual lives for two periods, write down his/her lifetime expected utility function and intertemporal budget constraint. Carefully interpret each of these equations. Explain why the lifetime budget constraint must be satisfied as a strict equality. Prove that C++1=C++1 from the permanent income hypothesis (PIH) to show that consumption follows a random walk. Discuss the full implication of this result. How do changes in r affect expected consumption growth? Interpret the effect of r on expected consumption in the light of precautionary saving. With the theoretical prediction of PIH mind, explain how Friedman sought to reconcile the evidence about consumption from cross-sectional data with that from time-series macroeconomic data.

Assume r = 0.1 is the present real interest rate and this rate is expected to prevail for the next 2 years. The monetary return (i.e. marginal revenue product) on machine A is expected to be R1 = $100,000 for year 1 and R2 = $50,000 for year 2. The present discounted value (PDV) of the net revenue flow from machine A to its owner is equal to ???

Suppose there is a nonrenewable resource with inverse demand function p= 20- 2q and with MEC= 10. Suppose the time horizon is 2 periods. The resource stock, S is finite and = 50 units.a. If interest rates are 60%, how much should be extracted in each period?

Calua is an economy in which people live for three periods. They receive an endowment in only one period as follows: 80 goods when young, or 90 goods when middle-aged or 115 goods when old. The real interest rate in Calua is 10%. Given this information, what endowment should a typical person choose? Assume the interest rate increases to 15%. Which endowment should a typical person now choose?

Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as a) Explain what is meant by a representative household. Briefly explain the budget constraints of the representative households and of the government. Explain the role played by the assumption that the representative households lives for only two periods and the assumption of “no discounting”.

1. Consider a household in the two-period consumption-savings model with well-behaved preferences over period-1 and -2 consumption given by u(c1,c2). Suppose that interest income in period 2 is taxed at a constant rate of T;. Assuming no initial endowment of wealth, Ao = 0, and the terminal condition A2 = 0, the household has the following nominal lifetime budget constraint: %3D P2c2 Y2 Pịci + = Y1 + (1+i(1 – Ti)) (1+i(1 – T;)) (a) Using indifference curve analysis, graphically locate the optimal choice (cj, cž). Label slopes and intercepts on your graph. (b) Write down the household's intertemporal optimality condition in terms of the gen- eral utility function. (c) In the United States, interest income received by households is taxed at a positive rate (i.e. T; > 0) while interest income paid by households is not taxed (i.e. Tị = 0). Suppose legislators propose complete elimination of this tax. Use economic logic and your answer from part (b) to explain how this policy change would…

Ben is a retired budget auditor who is currently looking for a new investment opportunity. He is considering two investments: Calzone Zone, a small restaurant specialising in calzone, and Icetown, a skating and curling rink. The projected cash flows of the two investments are shown below. Ben can only choose one projects, so he asks for your help and advice in reaching a decision on which investment to accept. He tells you he requires a 5% rate of return on his investment. Calzone Icetown Zone Cash flows £000 £000 Initial investment (885) 150 (300) 215 Cash flows year 1 Cash flows year 2 Cash flows year 3 Cash flows year 4 Cash flows year 5 195 215 200 230 265 215 215 (585) Assume the initial investment arises at the start of the first year of the project and all the subsequent cash flows occur at the end of the year. Question A. What are the economic factors reflected in the required rate of return? Discuss the likely effects of the economic shock brought by the COVID-19 pandemic on…

Find the marginal efficiency of capital if the prospective yield is 291 and the supply price is 52.