1. The Robinson Crusoe Farming Corporation faces the following real/productive invest- ment opportunity set: F(Yo, Y)...
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1. The Robinson Crusoe Farming Corporation faces the following real/productive invest- ment opportunity set: F(Yo, Y) = (100-Yo) (1.07 +0.0003Y) - Y = 107 - 1.04Y0 - 0.00032 - Y = 0 where Yo represents current-period dollars and Y corresponds to end-of-period dollars resulting from the investment in its farming operation. a. There is no capital market; however, Robinson Crusoe has assessed his utility for current and future consumption, which is as follows: U (Co, C) = C2C1 Solve for the optimal level of real investment for Robinson Crusoe. Hint: Robinson Crusoe's current wealth is found by solving F(Yo, Y) for Yo where Y = 0. b. Using the same real investment opportunity set and utility function as in part (a), solve for the optimal level of real investment and the optimal level of consumption where capital markets exists and the borrowing and lending rate equals 7.5 percent. Compare your answer to that obtained in part (a). 1. The Robinson Crusoe Farming Corporation faces the following real/productive invest- ment opportunity set: F(Yo, Y) = (100-Yo) (1.07 +0.0003Y) - Y = 107 - 1.04Y0 - 0.00032 - Y = 0 where Yo represents current-period dollars and Y corresponds to end-of-period dollars resulting from the investment in its farming operation. a. There is no capital market; however, Robinson Crusoe has assessed his utility for current and future consumption, which is as follows: U (Co, C) = C2C1 Solve for the optimal level of real investment for Robinson Crusoe. Hint: Robinson Crusoe's current wealth is found by solving F(Yo, Y) for Yo where Y = 0. b. Using the same real investment opportunity set and utility function as in part (a), solve for the optimal level of real investment and the optimal level of consumption where capital markets exists and the borrowing and lending rate equals 7.5 percent. Compare your answer to that obtained in part (a).
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