a
To plot: Graphical representation of scotch value function.
a
Explanation of Solution
Given the scotch value function in time period
The graph of this has been drawn below wherein the time period (t) is measured on the x-axis and value of the scotch (V) is measured on the y-axis.
The graph of the scotch value function exhibits a parabolic shape indicating that with the increase in time period, t, the value of the scotch, V, also increases but only up to point a. Thereafter the value of the scotch starts declining if it is kept for further time period.
Introduction:
Nominal interest rate is the monetary value of returns for the investment done.
Real interest rate is the nominal interest rate adjusted to inflation.
b)
To calculate: Value of t at which barrel of scotch is most valuable.
b)
Answer to Problem 14.6P
The scotch is most valuable when it is sold at
Explanation of Solution
Given Information:
The scotch value function in time period
Value of scotch =
The barrel of scotch will be most valuable at point a (see graph above) because it is at this point the scotch value curve reaches its maximum height. In order to determine the value of t at point a we need to obtain the first order condition
Hence, the scotch is most valuable when it is sold at
Introduction:
Nominal interest rate is the monetary value of returns for the investment done.
Real interest rate is the nominal interest rate adjusted to inflation.
c)
To calculate: Time period for immediate sale of the distiller should bottle the scotch
c)
Answer to Problem 14.6P
The distiller should bottle the scotch for immediate sale at
Explanation of Solution
Given Information:
The scotch value function in time period
Value of scotch =
Rate of interest = 5%
If the real interest rate is 5 percent, then the distiller should bottle the scotch for sale when the real interest rate of interest is equal to the proportional rate of growth of the scotch value. Thus,
Substituting the value of r and value for V,
Using the quadratic equation formula,
So that,
Since,
Introduction:
Nominal interest rate is the monetary value of returns for the investment done.
Real interest rate is the nominal interest rate adjusted to inflation.
d)
To calculate: Time period for immediate sale of the distiller should bottle the scotch when interest rate is 10%
d)
Answer to Problem 14.6P
The distiller should bottle the scotch for immediate sale at
Explanation of Solution
Given Information:
The scotch value function in time period
Value of scotch =
Rate of interest = 10%
If the real interest rate changes to 10 percent, then
Substituting the value of r and value for V, we have
Using the quadratic equation formula,
So that,
Since,
Introduction:
Nominal interest rate is the monetary value of returns for the investment done.
Real interest rate is the nominal interest rate adjusted to inflation.
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Chapter 14 Solutions
MINDTAP: INTERMEDIATE MINCROECON -ACCES
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