capital.pdf - Review questions on capital

capital.pdf - Review questions on capital - Capital Chapter...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Capital Chapter 17 1. Suppose a winery is a profit-maximizing firm and is considering when to sell a new wine. The value of the wine increases as it ages, and the value of the wine in year t is f(t)=exp(0.18t-0.0025t 2 ). Assume that the real rate of interest is 7 percent. (Hint: Remember from calculus that de x /dx = e x .) a) Explain in words and mathematically when the firm will sell the wine. b) Explain how an increase in the real interest rate to 10 percent would affect the firm’s marketing strategy c) The owners of the winery decide to store the wine until the value of the wine is maximized. How long will they store the wine? Discuss whether this strategy is in the owner’s best economic interests. Answer: a) The company will let the wine age until the proportional rate of growth in the value of the wine equals the interest rate, i.e., r=f’(t)/f(t). If r=.07 then t=22. b) If the interest rate rises, then the firm will sell the wine sooner and invest the money at the market rate of interest. They will not accept a proportional rate of growth in the value of the wine that is less than 0.1, since they can sell the wine and earn a market rate of return on their profits. Therefore, the company will sell the wine, when the wine is appreciating more rapidly than in part a. If r=.10 then t=16. d)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/26/2008 for the course ECON 101 taught by Professor Buddin during the Winter '08 term at UCLA.

Page1 / 2

capital.pdf - Review questions on capital - Capital Chapter...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online