1. (5 points) A purchase of government bond generates S1 in perpetuity, beginnin
ID: 1146020 • Letter: 1
Question
1. (5 points) A purchase of government bond generates S1 in perpetuity, beginning next year. An investment project generates $22 in the next year and $0 afterwards. If the interest rate is 10%, what should be the price of government bond relative to that of the investment project? 2. (5 points) Suppose that all the available land in country A is being rented for cither housing or farming. Describe what would happen in the markets for farmlands and housing lands in the long run, if the government were to start subsidizing wheat production. 3. (5 points) True or false? "Since negative externalities are detrimental to social welfare, the goal of any sensible government policy must be to stop all negative-externality-generating activities altogether" 4. (5 points) Suppose government officials have set an emissions tax to reduce pollution. Further suppose that with the emissions tax, the marginal social cost of pollution is smaller than the marginal social benefit of pollution. Should the tax be adjusted, and if so -should it be increased or decreased?Explanation / Answer
Answer 1)
Present Value of Bond of such type is $1/10%=$10
Investment will generate $22 next year and $0 onwards therefore PV =$22/1.1+0=20
Price of Government bond is half of that investment project
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