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Sir 2 things I did not understand in Baumol model e.g 2
1) Interest lost on investment which we calculated by
Interest rate on investment (%) multiply by (Investment sold at start of year + cumulative investment sold at end of year) / 2a) what was the reason of doing this
b) The above formula which I have wrote is correct, if not please rectify it And can it be applied in every question?2) Interest earned on bank balance which is calculated by
interest earned on bank balance (%) multiply by investment sold each time /2a)what was the reason of doing this
b) The above formula which I have wrote is correct, if not please rectify it And can it be applied in every question?
c) What was the reason of dividing investment sold each time (i.e 150000) by 2?Throughout the year they are withdrawing 150,000 each time in order to pay expenses. Therefore at the beginning they are losing interest just on the 150,000 withdrawn, but by the end of the year they are losing interest on the whole of the 1,500,000.
The amount they withdraw each time is not all spent at once, so they put it in the bank and earn interest on it. But because they are spending it, the amount in the bank earning interest fluctuates between the 150,000 at the start and zero at the end.
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