Finance Theory

BELOW ARE THE ASSUMPTIONS UNDER CONSUMPTION AND INVESTMENT WITHOUT CAPITAL MARKETS EXCEPT

• All outcomes from investment are

  known with certainty.

• There are no transaction costs or taxes.

• The decisions are made in one-period context.

• Timing are perfect

BELOW ARE THE LABELS USUALLY USED FOR TOTAL UTILITY GRAPH FUNCTION EXCEPT:

• •Income at the begin-

  ning of period = Y0

• •Income at the end of

  the period = Y1

• •Actually consumption

  now = C0

• •End of the period

  Consumptions = C

MRS = - (1+ri) THIS IS A MATHEMATICAL EXPRESSION FOR

• how many extra units of consumption today

• how many extra units of consumption tomorrow must be received in order to give up one unit of consumption today and still have the same total utility.

• how many extra units of consumption tomorrow must be received in order to give up two unit of consumption today and still have the same total utility.

• how many extra units of consumption tomorrow must be received in order to give in one unit of consumption today and still have the same total utility.

What happens if we introduce productive opportunities that allow the unit of current savings/investment to be turned into more than one unit of future consumptions?

• The more an individual invests, the lower the rate of return on the marginal investment.

• An individual will make all investments in productive opportunities that have high rates of return.

• many extra units of consumption tomorrow must be received in order to give up one unit of consumption today and still have the same total utility.

X1 = X0 + rX0 THIS IS A FORMULA OF

• PRESENT VALUE

• FUTURE VALUE

W0 = y0 + y1(1+r)^(-1) IS THE FORMULA OF

• FUTURE VALUE

• PRESENT VALUE