Tim has preferences over consumption in period 1 and 2 of the form . The price...

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Finance

Tim has preferences over consumption in period 1 and 2 of theform . The price of consumption is $1 in both periods. He has$10,000 in the bank now and is trying to decide between twodifferent investment opportunities, A and B.
A: invest $4,000 in period 1 and receive $8,000 in period 2.
B: invest $2,000 in period 1 and receive $5,000 in period 2.
If Tim can borrow and save at a rate of interest of 50 percent,which investment opportunity will he choose? (Assume that Timcannot invest more than $4000 if he chooses A, or $2000 if hechooses B.) Show your analysis
Given your answer in (a), how much will he consume in eachperiod?
Given your answer in (a), how much will he consume in eachperiod if now his saving interest rate is 20% and the borrowingrate is still 50%? Show your analysis.

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3.6 Ratings (489 Votes)

Underlying objective behind each investment is to maximize the Net Present Value NPV Using a discount rate of 50 the NPVs of both the investments is 1 NPV of A 4000 8000 15 133333 2 NPV See Answer

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Transcribed Image Text

Tim has preferences over consumption in period 1 and 2 of theform . The price of consumption is $1 in both periods. He has$10,000 in the bank now and is trying to decide between twodifferent investment opportunities, A and B.A: invest $4,000 in period 1 and receive $8,000 in period 2.B: invest $2,000 in period 1 and receive $5,000 in period 2.If Tim can borrow and save at a rate of interest of 50 percent,which investment opportunity will he choose? (Assume that Timcannot invest more than $4000 if he chooses A, or $2000 if hechooses B.) Show your analysisGiven your answer in (a), how much will he consume in eachperiod?Given your answer in (a), how much will he consume in eachperiod if now his saving interest rate is 20% and the borrowingrate is still 50%? Show your analysis.