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Daddy Warbucks has given his niece the following choice. She can choose between twodifferent inheritance bundles. Bundle F consists of $100 tomorrow and $10 today. Bundle Pconsists of $30 tomorrow and $60 today. His niece can borrow and lend money at an interestrate of 15%. Consumption goods cost $1 per unit today and there is no inflation
.(a) What is the present value of each of the two bundles? The future values?
(b) Which bundle do you think the niece of Daddy Warbucks should choose? Explain whyin terms of a diagram that illustrates combinations of ?1 (consumption today) and ?2(consumption tomorrow) which are affordable for each inheritance bundle.
(c) Bankers recognize that perfect capital markets make it hard to make money by lendingmoney. Thus they will now pay the niece 15% for any monies that she lends them andthey will charge her 50% interest on any monies that she borrows. Which bundle willthe niece choose? Why? Again answer using a diagram illustrating combinations of ?1and ?2 which are affordable for each inheritance bundle.
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