QUESTION 1 Which of the following statements is correct? The demand for future g

Question

QUESTION 1

Which of the following statements is correct?

The demand for future goods is derived from consumers’ utility maximization problems over current and future consumption goods.

It is the present value of future consumption goods that enters into the budget constraint of a consumer’s utility maximization problem over current and future consumption goods.

The solution to a consumer’s utility maximization problem over current and future consumption goods can be interpreted as wealth not currently consumed that is invested to yield future consumption.

All of the above.

10 points   

QUESTION 2

Which of the following statements is correct?

In a consumers’ utility maximization problems over current and future consumption goods, a higher rate of return r produces substitution and income effects that cause a decrease in quantity demanded of future consumption goods.

In a consumers’ utility maximization problems over current and future consumption goods, a higher rate of return r produces substitution and income effects that cause an increase in quantity demanded of current consumption goods.

In a consumers’ utility maximization problems over current and future consumption goods, a higher rate of return r produces substitution effects that favor more saving and income effects that favor less.

All of the above.

10 points   

QUESTION 3

Assume that someone has inherited 2,000 bottles of wine from a rich uncle. He or she intends to drink these bottles over the next 40 years. Suppose that this person’s utility function for wine is given by u(c(t)) = (c(t))0.5, where c(t) is each instant t consumption of bottles. Assume also this person discounts future consumption at the rate = 0.05. Hence this person’s goal is to maximize 040 e–0.05tu(c(t))dt = 040 e–0.05t(c(t))0.5dt. Let x(t) represent the number of bottle of wine remaining at time t, constrained by x(0) = 2,000, x(40) = 0 and dx(t)/dt = – c(t): the stock of remaining bottles at each instant t is decreased by the consumption of bottles at instant t. The current value Hamiltonian expression yields: H = e–0.05t(c(t))0.5 + (– c(t)) + x(t)(d/dt). This person’s wine consumption decreases at a continuous rate of _______ percent per year. The number of bottles being consumed in the 30th year is approximately _________. (NOTE: Write your answers in number format, rounding to tens (whole numbers, no decimals). Use a comma to separate groups of thousands. HINT: See Example 2.14)

10 points   

QUESTION 4

Which of the following statements is correct?

The competitive rental rate of machines (capital) is the sum of forgone interest and depreciation costs the machine’s owner must pay for one period.

In the case of machines that do not depreciate, the competitive rental rate of machines (capital) is equal to forgone interest for an infinitely long time.    

The competitive rental rate of machines (capital) is the cost borne by firms whether they rent the machines they use or own them.  

All of the above.

10 points   

QUESTION 5

Which of the following statements is correct?

A decrease in the real interest rate (r) will, ceteris paribus, decrease the rental rate of machines (capital); this will prompt firms to decrease their capital usage.

A decrease in the real interest rate (r) will, ceteris paribus, decrease the rental rate of machines (capital); this will prompt firms to increase their capital usage.

A decrease in the real interest rate (r) will, ceteris paribus, increase the rental rate of machines (capital); this will prompt firms to increase their capital usage.

All of the above.

10 points   

QUESTION 6

Assume r = 0.1 is the present real interest rate and this rate is expected to prevail for the next 2 years. The monetary return (i.e. marginal revenue product) on machine A is expected to be R1 = $100,000 for year 1 and R2 = $50,000 for year 2. The present discounted value (PDV) of the net revenue flow from machine A to its owner is equal to [PDV]. (NOTE: Write your answer in number format, with 2 decimal places of precision level; do not write your answer as a fraction. Add a leading zero and trailing zeros when needed. Use a period for the decimal separator and a comma to separate groups of thousands.)

10 points   

QUESTION 7

Consider a forester who must decide when to cut down a growing tree. Suppose the net value of the tree at any continuous time t is given by f(t) = 10exp{0.01t2}. Assume also that the (continuous) market interest rate is given by r = 0.04. The present discounted value of the tree owner 10 years after it is planted is [PDV]. (NOTE: Write your first answer in number format, with 2 decimal places of precision level; do not write your answer as a fraction. Add a leading zero and trailing zeros when needed. Use a period for the decimal separator and a comma to separate groups of thousands. HINT: See Example 17.3.)

10 points   

QUESTION 8

Consider a forester who must decide when to cut down a growing tree. Suppose the net value of the tree at any continuous time t is given by f(t) = 10exp{0.01t2}. Assume also that the (continuous) market interest rate is given by r = 0.04. The optimal harvesting age for this tree is [t]. Ignore the second order condition. (NOTE: Write your answer in number format, with 2 decimal places of precision level; do not write your answer as a fraction. Add a leading zero and trailing zeros when needed. Use a period for the decimal separator and a comma to separate groups of thousands. HINT: See Example 17.3.)

10 points   

QUESTION 9

Which of the following statements is correct about the optimal time of tree harvest problem?

The optimal time of harvest is independent of the initial costs of planting the tree

The optimal time of harvest is when the marginal benefit of an additional year’s growth equals the marginal opportunity cost of capital.

The optimal time of harvest decreases when the market interest rate increases.

All of the above.

10 points   

QUESTION 10

Which of the following will affect natural resources pricing?

Whether the resource is finite or renewable.  

Whether substitutes are available.

Whether technical advances decrease the resources’ marginal extraction costs.

All of the above.

The demand for future goods is derived from consumers’ utility maximization problems over current and future consumption goods.

It is the present value of future consumption goods that enters into the budget constraint of a consumer’s utility maximization problem over current and future consumption goods.

The solution to a consumer’s utility maximization problem over current and future consumption goods can be interpreted as wealth not currently consumed that is invested to yield future consumption.

All of the above.

Explanation / Answer

1. The answer is all of the above because derived demand is the demand for a good which will be produced in near future. So all points are valid.

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