3 Namin's output has been constant at P every year. In year 0, it finds an investment project that willincrease its output by (0.0SP cach year, from year 2 onwards. It can borrow frum the Shire at an interest rate of just 4%a ycar (hobbits are very nice people), but any borrowing is to he paid in perpetuity from year I (pertups not so nice).n. What is the maximum cost of the project, in terms of Y, so that the investment is worthwhile?b. You're Narmin's Treasurer. Assuming that the project's actunl cost is AK = 0.8P, devise a consumption-smonthingplan for Namia by borrowing from the Shire, so that Narnia can take advantage of the investment project whilemaintaining a snooth consumption path.

Output = Y Output increases by 0.05Y each year from year 2. Interest rate = 4% = 0.04

Namin's output has been constant at P every year. In year 0, it finds an investment project that will increase its output by 0.0SP cach year, from year 2 onwards. It can borrow frum the Shire st an interest rate of just 4% a ycar (hobbits are very nice people), but any borowing is to be paid in perpetuity from year I (perhaps not so nice). a. What is the maximum cost of the project, in terms of f. so that the investment is worthwhile? b. You're Namia's Treasurer. Assuming that the project's actual cost is AK = 0.89, devise a consumption-smoothing plan for Narmia by borrowing from the Shire, so that Narnia can take advantage of the investment project while maintaining a snooth consumption path.

Namin's output has been constant at P every year. In year 0, it finds an investment project that will increase its output by 0.0SP cach year, from year 2 onwards. It can borrow frum the Shire st an interest rate of just 4% a ycar (hobbits are very nice people), but any borowing is to be paid in perpetuity from year I (perhaps not so nice). a. What is the maximum cost of the project, in terms of f. so that the investment is worthwhile? b. You're Namia's Treasurer. Assuming that the project's actual cost is AK = 0.89, devise a consumption-smoothing plan for Narmia by borrowing from the Shire, so that Narnia can take advantage of the investment project while maintaining a snooth consumption path.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter17: Financial Markets

Section: Chapter Questions

Problem 5SCQ: Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is...

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