332mid10 - UNIVERSITY OF TORONTO Joseph L. Rotman School of...

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Unformatted text preview: UNIVERSITY OF TORONTO Joseph L. Rotman School of Management Oct. 19, 2010 Florence/Kan RSM332 MID-TERM EXAMINATION Simutin/Tolias/Yang DURATION - 2 hours Aid Allowed: Silent electronic calculator and one 1-sided 8 1 2 ” × 11” crib sheet Name: Student Number: Circle the section that you are registered in: Kan (Mon 11a.m.–1p.m.) Kan (Mon. 1–3p.m.) Kan (Tue.) Simutin (Wed. 8–10a.m.) Simutin (Wed. 2–4p.m.) Simutin (Wed. 4–6p.m.) Yang (Tue. 11a.m.–1p.m.) Yang (Tue. 7–9p.m.) Tolias Florence (Tue. 1–3p.m.) Florence (Tue. 3–5p.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 1. Suppose you have the following utility function U ( C ,C 1 ) = C C 1 , where C is today’s consumption and C 1 is tomorrow’s consumption. You are endowed with Y = 12 today and nothing tomorrow. There is a production opportunity that if I is invested today, then the output tomorrow would be f ( I ) = 40 √ I . There is also a capital market where lending and borrowing rate of interest is r = 1 / 3, i.e., if you borrow (or lend) 1 unit of good today, you will pay (or be paid) 4 3 units of goods tomorrow. (a) Suppose you have access to the production opportunity but do not have access to the capital market (i.e., you cannot borrow, lend or save the money you have today), how much should you invest in the production? What is your optimal consumption plan? (7 marks) 2 (b) Now suppose you have access to both the production opportunity and the cap-...
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This note was uploaded on 10/21/2011 for the course RSM 332 taught by Professor Raymondkan during the Spring '08 term at University of Toronto.

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332mid10 - UNIVERSITY OF TORONTO Joseph L. Rotman School of...

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