CHAPTER 17
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.
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 Spring '09
 Smith
 Time Value Of Money, Utility, Interest, Trigraph, present discounted value

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