ch17 - CHAPTER 17 CAPITAL MARKETS The problems in this...

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CAPITAL MARKETS The problems in this chapter are of two general types: (1) those that focus on intertemporal utility maximization and (2) those that ask students to make present discounted value calculations. Before undertaking the PDV problems, students should be sure to read the Appendix to Chapter 17. That appendix is especially important for problems involving continuous compounding because students may not have encountered that concept before. Because the material on dynamic optimization is rather difficult, only one problem on it is included (17.10). Comments on Problems 17.1 A graphic analysis of intertemporal choices. Illustrates the indeterminacy of the sign of the interest elasticity of current savings. Part (c) concerns intertemporal allocation with initial endowments in both periods. 17.2 A present discounted value problem. I have found that the problem is most easily solved using continuous compounding (see below), but the discrete approach is also relatively simple. Instructors may wish to point out that the savings rate calculated here (22.5 percent) is considerably above the personal savings rate in the United States. That could lead into a discussion of the possible effects of social security. 17.3 A simple present discounted value problem that should be solved with continuous compounding. 17.4 A traditional capital theory problem. Students seem to have difficulty in seeing their way through this problem and in interpreting the results. Hence, instructors may wish to allow some time for discussion of it. 17.5 Further analysis of forestry economics shows how replanting costs affect PDV calculations. 17.6 A discussion question that asks students to explore the logic of the U.S. corporate income tax. The case of accelerated depreciation is, I believe, a particularly effective example of the time value of money. 17.7 A present discounted value example of life insurance sales tactics. Students tend to like this problem and, I’m told, some have even used its results when approached by actual salespeople. 17.8
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This note was uploaded on 11/06/2009 for the course ECON ECON111 taught by Professor Smith during the Spring '09 term at Punjab Engineering College.

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ch17 - CHAPTER 17 CAPITAL MARKETS The problems in this...

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