?

2. Consider a wine dealer owning 100 liters of wine that he could sell for K dollars

today (t = 0). There are no storage costs. The value V of the wine grows

according to the following function:

V (t) =Ke

p

t(i.e. exponential value of e with square root of t in above equation i.e V(t)=Ke...)

The interest rate, on continuous compounding basis, is equal to r. Denote the

present value of V (t) by A(t).

(a) Compute the optimal point in time t to sell the wine, that is, determine

the point in time t at which the marginal present value of holding on to

the wine is equal to zero.

(b) Show that taking the natural logarithm of A(t) and setting d ln(A)

dt = 0

yields an identical solution for t.

(c) Provide an economic interpretation of the equation used to derive t.