Suppose that the cost of cutting down a tree is zero and the tree grows on land that is useless for anything else, that the interest rate is constant, and that the price of lumber does not change.The optimal time to cut the tree is when the difference between its growth rate and the interest rate is maximized.

Question

Quizplus · Accepted Answer

The optimal time to cut the tree is when its growth rate equals the interest rate, not when the difference between its growth rate and the interest rate is maximized. This is because the value of the tree must grow at the rate of interest to make holding onto the tree as valuable as selling it and investing the proceeds at the interest rate.

Suppose That the Cost of Cutting Down a Tree Is