hw1 - UNIVERSITY OF TORONTO Joseph L. Rotman School of...

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UNIVERSITY OF TORONTO Joseph L. Rotman School of Management RSM332 PROBLEM SET #1 1. Suppose you own a farm that, if run efficiently, can produce corn according to the following “transformation” formula: W 1 = 400 q I 0 where I 0 is the number of bushels of corn planted in date 0, and W 1 is the number of bushels turned over to you in date 1, net after all payments to labor and other hired inputs. Your utility function of consumption at date 0 and consumption at date 1 is: U ( C 0 ,C 1 ) = minimum( C 0 ,C 1 ) (a) If 50,000 bushels of corn are planted, what will be the net output of corn at date 1? (b) If you set a target for output of 100,000 bushels, what is the minimum number of bushels that must be planted? (c) Suppose capital markets do not exist, and you can neither borrow, lend, or store any corn at the beginning of date 0. If you have 22,500 bushels of corn at date 0, what will your production plan be? Your consumption plan? What will be the average rate of return on investment of corn? What will be the rate of return on the marginal investment? (d) If 22,500 bushels are planted, what will be the average rate of return on the invest- ment? What will be the rate of return on the marginal investment? (e) If a capital market exists, and the rate of interest is 33 1 3 %, what will be your optimal investment? (f) If you have no corn at date 0, a capital market exists (33 1 3 % rate of interest), and you invest optimally, what is your equity in the venture? What will be your optimal consumption plan? Outline your sources and uses of funds for date 0 and date 1.
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This note was uploaded on 10/22/2011 for the course RSM 332 taught by Professor Raymondkan during the Spring '08 term at University of Toronto- Toronto.

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hw1 - UNIVERSITY OF TORONTO Joseph L. Rotman School of...

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