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Unformatted text preview: 4.4 There would be too much borrowing. The borrowers would have to be given limited access to the market. This would also be an irresistible arbitrage opportunity that could not last long and a new equilibrium would be set. 4.5 a. Since the PV of labour income is $60, and $60 = $40 + $22 / (1 + r), r must be equal to 10%. b. NPV = $75 - $60 = $15 b. Her wealth is $75. Letting C denote consumption, she wants $75 = C + C/(1 + r) where r = 0.10. Solve for C; C = $39.29 4.6 a. $90,000 / $80,000 - 1 = 0.125 = 12.5% b. He will invest $10,000 in financial assets (i.e. put this much in the bank) and $30,000 in productive assets (i.e. spend this much on the investment opportunity) today. c. NPV = -$30,000 + $56,250 / 1.125 = $20,000 Answers to End-of-Chapter Problems B-20...
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This note was uploaded on 11/02/2011 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.
- Fall '08