1. The value of timber is V (t) = 2 t . Assume that the interest rate on the continuous-compounding basis is r.

What is the optimal time to cut the timber for sale? p Sol: The present value of V (t) is A (t) = V (t) e rt = 2 t e rt : We have ln A (t) ln A (t) ln A (t) and d ln A (t) dt 1 A0 (t) A (t) A0 (t) = = = d p t ln 2 rt dt ln 2 p r 2 t ln 2 p r A (t) 2 t = = ln 2
p t

rt rt

ln 2 t + ln e p t ln 2 rt; =

p2 r = The maximizer t of A (t) satises A0 (t ) = 0. It follows that 2ln t 0(Note that A (t) > 0 for all t 0). Then the optimal time to cut the timber 2 2 for sale is t = ln . 2r

2. Determine the nature of the possible equilibrium states for: (a) x _ = x 1, (b) x _ + 2x = 24, (c) x _ = x2 9. Ans : (a) x = 1 is unstable. (b) x = 12 is stable. (c) x = 3 is unstable, x = 3 is stable.