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Unformatted text preview: explain whether the factor substitution effect or the output effect is larger. (1 point) 3. A firm has the choice of the following investments Investment A: costs $5000 today, pays a total of $4000 next year and $1700 the second year. No value beyond that. Investment B: costs $10000 today, pays $2000 next year and $9800 the second year. No value beyond that a) Show which, if any, investments the firm will make if the interest rate is 10%. (1 point) b) Show which, if any, investments the firm will make if the interest rate is 5%. (1 point) c) Someone claims that the rate of return of project B is 9%. Explain whether or not you can refute this claim base only on the data from parts (a) and (b). Then set up (but do not solve) and equation that you give us an exact answer for the rate of return of the project. (2 points)...
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 Spring '10
 HICKENBOTTOM

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