A person will receive a flow of income 99 in period 1 (now) and 142 in...

 

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A person will receive a flow of income £99 in period 1 (now) and £142 in period 2 (later). There is a perfect capital market and the interest rate is 12%. If C1 = consumption in period 1 and C2 = consumption in period 2, the person's preferences can be described by a utility function U=C1C2, a) What is the Present Value of this person's income flow? What is the Future Value? (4 marks) b) On a diagram draw the person's wealth constraint. Indicate clearly the slope of the wealth constraint and mark both the present value and future value of the person's wealth. 4 marks) c) What will be the consumer's utility maximising consumption level in each period? How much does the consumer borrow on the capital market? (6 marks) d) The person has an investment opportunity that costs £50 in period 1 and returns £75 in period 2. What is rate of return (R)? Calculate the NPV of the project. Show on your diagram, how the consumer's wealth constraint and equilibrium changes when the project is selected. (6 marks) A person will receive a flow of income £99 in period 1 (now) and £142 in period 2 (later). There is a perfect capital market and the interest rate is 12%. If C1 = consumption in period 1 and C2 = consumption in period 2, the person's preferences can be described by a utility function U=C1C2, a) What is the Present Value of this person's income flow? What is the Future Value? (4 marks) b) On a diagram draw the person's wealth constraint. Indicate clearly the slope of the wealth constraint and mark both the present value and future value of the person's wealth. 4 marks) c) What will be the consumer's utility maximising consumption level in each period? How much does the consumer borrow on the capital market? (6 marks) d) The person has an investment opportunity that costs £50 in period 1 and returns £75 in period 2. What is rate of return (R)? Calculate the NPV of the project. Show on your diagram, how the consumer's wealth constraint and equilibrium changes when the project is selected. (6 marks)

Answer rating: 100% (QA)

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