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# Question 1. This question basically asks you to compare the Net Present Value (NPV) to the Internal Rate of return (IRR) on the time length

Question 1. This question basically asks you to compare the Net Present Value (NPV) to the Internal Rate of return (IRR) on the time length of an investment project.. a. Draw a "growth curve" for a investment project on a log PV 7 33 space and interpret it's meaning. b. On your graph show the optimal investment time under the NPV criterion c. Show the same for the IRR criterion d. In general when do you prefer IRR over NPV ? Question 2. a. Dene Compensating Variation and Equivalent Variation and show how they are related. b. Which one is the appropriate measure of the "value of life" in a risky project '? c. Dene Clemto be the compensating variation for a movement from state 1 to risky state 2 for individual i. If a worker might die in state 2 what we expect the value of CV,-12 to be innite, so no risky project entailing the possibility of death would be undertaken. How do you resolve this apparent dilemma ? Question 3. This question basically asks you to compare the Arrow- Debrue model to the Dreze-Stern model. a. What features of the Arrow-Debrue model make it problematic to use in project evaluation ? b. How is the Dreze-Stern model more useful from a theoretical prespective for project evaluation '3' c. In the D-S model what is the sufcient statistic. d. In general why do economists prefer shadow prices over market prices when evaluating a policy ? Question 4. Consider two possible states of nature 31 and 32 and three possible actions slag and a3_ a. Interpret the "ordered pair\" (asj) for i 6 {1,2,3} and j E {1,2} Suppose P(a,,;, 53-) denotes the payoff arising from (Eli's-1'). Let P (0.1, 51) = 130, 000, P(a2,sl) = 140, 000, P(a3,31) = 80,000 and P(a1,52) = 400,000, P(a,2, 32) = 260,000, P(a3, 32) = 90,000 b. Represent this in a table c. Find the maximin solution d. Find the minimax solution Question 5. Consider the following 3 criteria for undertaking an investment project: (i) PVAB) > K, r is the social rate of discount (ii) PVp(B) > K , p is the private rate of discount or market interest rate (iii) PVLJB) > K, where p1: Ewin- + Z wj'rj and 211),; + Z wj 1 n+1 n+1 and PV(B) is the net benet of1 a stream of benets 30,1... .,BT and K 13 the initial outlay a. What real world feature makes (iii) a better criterion than (i) or (ii) '2' b. If there is no consumption which criterion would you use '3' c. What are the potential problems with all three criteria ? Question 6 This question is about the normalized compounded terminal value criterion (NCTV) T T Dene the approximation to NCTV as AppTV(B) = Z th(1 + T)T'1 + E (1 * c)Bt(1 + p)T'1 where 13:1 : c E [0, 1] is the fraction of the benets consumed as they occur and (1 i c) is invested at a rate p. a. What is the expression for AppTV(B) when the initial outlay K is raised entirely by taxation ? b. What is the expression for AppTV(B) when the initial outlay K is raised entirely through borrowing ? c.If a public project is undertaken to produce a collective good only nd the exact terminal value of the stream of benets {36321. cl. When all benets {13}le are cash returns nd the exact terminal value of the stream of returns

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