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# HW4 - K L 2,2 maximize the firm’s profit(Hint(i Compute r...

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Homework 4 (Due October 15) 1. Refer to page 5, L4. (1) Explain why it is impossible to have r 1 5% and i 0 4%. (2) Explain why it is impossible to have r 1 4% and i 0 5%. (3) One can identify r in the model to the return for stocks and identify i in the model to the return for treasury bonds. In reality those returns are different. Find a factor missing in the model which can cause the difference in returns. 2. Refer to page 9, L4. Verify the claim of zero profit. (This has been done in L2. But do it anyway.) 3. Refer to pages 8, L4. Suppose that K 0 L 0 100, A 0 1 and 0.5. (1) Can K , L 0.9,1.1 maximize the firm’s profit? (2) Can K , L 1,1 maximize the firm’s profit? (3) Can
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Unformatted text preview: K , L 2,2 maximize the firm’s profit? (Hint: (i) Compute r and w under given K ∗ , L ∗ , A and . (ii) Then compute the profit for each K , L .) 4. [page 12, 3] NQ 1 (a, b, c). 5. The individual maximizes U c , c 1 3 c 2 c 1 subject to c c 1 1. What is the optimal c , c 1 ? (Hint: (i) If the consumption at t 0 is c then the consumption at t 1 is c 1 1 − c . (ii) Consuming c at t 0 and c 1 1 − c at t 1 gives utility in the amount of 3 c 2 1 − c . (iii) The choice of c is between 0 and 1.)...
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