UNIVERSITY OF TORONTO
Joseph L. Rotman School of Management
Oct. 21, 2008
Ezer/Kan/Florence
RSM332
MIDTERM EXAMINATION
Pomorski/Zhou
DURATION  2 hours
Aid Allowed: Silent electronic calculator and one 1sided 8
1
2
”
×
11” crib sheet
Name:
Student Number:
Circle the section that you are registered in:
Ezer
Zhou
Florence (10a.m.–12p.m.)
Florence (12p.m.–2p.m.)
Kan (Mon.)
Kan (Tue. 9a.m.–11a.m.)
Kan (Tue. 1p.m.–3p.m.)
Pomorski (Tue.)
Pomorski (Wed. 2p.m.–4p.m.)
Pomorski (Wed. 4p.m.–6p.m.)
Instructions
1. Write all your answers on the examination paper.
2. Answer five out of six questions. Each question is worth 20 marks. Do not answer all
six questions! In the table below, cross out the question that you choose not to answer.
Question
Marks
1
2
3
4
5
6
Total
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
1. Consider two consumers, Mr. C. E. Oh and Mrs. O. Ner.
Mr. Oh’s utility function
is
U
O
(
C
0
, C
1
) =
C
1
2
0
C
1
2
1
and Mrs. Ner’s utility function is
U
N
(
C
0
, C
1
) =
C
1
4
0
C
3
4
1
. They
each receive labor income of $1,000 today and nothing next period.
Moreover, there is a factory: a production opportunity that transforms input invested
today,
I
0
, into the output of
f
(
I
0
) = 30
I
1
2
0
next period.
A capital market is not
available.
(a) Mr. Oh is managing the factory. What is the optimal investment implied by his
own utility function and income? (5 points)
(b) Mrs. Ner is the owner of the factory. If she invests exactly as what Mr. Oh suggested
in part (a), what will be her utility from consumption today and next period? (2 points)
(c) If Mrs. Ner instead chose the optimal level of investment according to her own
utility function and income, how much would she invest? What would be her utility?
(4 points)
(d) We want to compensate Mrs. Ner for having to separate ownership and control.
Suppose that Mrs. Ner lets Mr. Oh tell her how much to invest (as in part (a)). By
how much would her consumption today,
C
0
, need to go up (keeping
C
1
at the same
level as in part (b)) so that her utility is the same as in part (c)? (4 points)
(e) Now suppose that there is a capital market that Mr. Oh and Mrs. Ner can lend
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 BOOTH
 Interest Rates, Mrs. Ner, Mrs. O. Ner

Click to edit the document details