final_08e

# final_08e - Econ M134 UCLA Winter 2008 March 19th 2008...

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2. Mike owns one tree. Its height, measured in feet, is a function of the tree’s age, measured in years, with production function ( 29 age Feet 50 = . Assume that the real price per foot of wood is always equal to \$40. Suppose the cost of cutting down the tree is \$10. (note that this is a fixed cost) Assume that the interest rate always equals 4%. Mike’s goal is to maximize the PDV of his profits. a. (+4) Write down the profit function as a function of age, and describe how you will find the optimal tree cutting age. (you need not actually find the age) b. (+4) Now suppose the interest rate is increase to 8% permanently. Will the optimal tree cutting age increase or decrease? Explain. (You need not solve for the new optimum) c. (+4) Now suppose that each year there is a 8 1 ( or 12.5%) chance that Kahn will sneak into the forest and cut down Mike’s tree. In which case Mike will receive \$0. Assume the interest rate is 8%.
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## This note was uploaded on 11/12/2010 for the course ECON M134 taught by Professor Bresnock during the Spring '08 term at UCLA.

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final_08e - Econ M134 UCLA Winter 2008 March 19th 2008...

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