# P2 - EC314-Fall 2010 Problem Set 2 Matt Turner When you write up your answers your goal should be to(1 be correct and(2 convince your reader that

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Unformatted text preview: EC314-Fall 2010 Problem Set 2 Matt Turner When you write up your answers, your goal should be to (1) be correct, and (2) convince your reader that your answer is correct. Answers which do not achieve these goals will not be awarded full credit. To accomplish the second objective, it is helpful if your work is legible and if all steps are presented, possibly with a line of explanation. Please STAPLE pages together so that we do not lose them. (This problem set updated: 6 October 2010) . Problems 1. Prove that ∑ ∞ t = 1 ( 1 1 + r ) t = 1 r . 2. One problem with discounting is that is counts future benefits very little after we get more than a few years ahead. To see this, conduct the following three exercises: (a) Write the expression for the present value of a one hundred dollar payoff 100 years from now as a function of the interest rate. (b) Plot this present value as a function of r . (c) Policy makers actually use discounting when they are trying to make decisions. Com- monly used discount rates range between 3% and 10%. What is the present value of our 100\$ payoff 100 years from now at these two interest rates....
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