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Practice problem--it's very helpful ~

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Department
Economics
Course
ECO359H5
Professor
Sun
Semester
Winter

Description
ECO3592011 UniversityofToronto PracticeProblems DepartmentofEconomics ECO 359 Practice Problems 1 Solution Guidelines 1. (a) From your lecture notes: + L N, hence + L M . N. Note that the project will only be carried out if r < 5 (else +H). (b) The NPV of investing I units into the project is given by I & L .+ - :N . +J + I - N Verify that maximizing the above NPV indeed yields your answer in (a). Maximizing NPV yields M . + L N, hence again: + L M . N. (c) i. The constraint is # - ?$L IM for ? # IH. Note that the budget line does not extend to the right of the endowment (your cannot borrow with the storage technology). ii. Assuming N 4 H, the budget constraint is ? - ?$ L IH - M # I - N I - N If N O H, Chuck will only deal with the back to borrow, but will use the storage technology to save. Hence, the budget constraint is: ? - ? L IM*KN? O IH
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