Hence no matter what Bill Ross' preferences are, he must be made better off if the budget constraint is pushed out. Clearly the best that he can do is therefore to go on doing projects until he can push out his budget constraint no farther. This is true no matter what his fe erences are OA Level of investment he should undertake The crucial point here is that the level of investment he should undertake does not depend on his preferences. This implies that his consumption and production decisions are separate If you have $100 now and the interest rate is 10% per year, then you can invest the $100 and get $110 in a year' s time. The future value of $100 in I year,'s time at 10% is $110 In general C1=(1+r)PⅤ FV formula Another way of saying the same thing is that the present value of $110 in l year's time if the interest rate is 10% is $100. In general PV= CI PV formula 1+ 1111 Hence no matter what Bill Ross' preferences are, he must be made better off if the budget constraint is pushed out. Clearly the best that he can do is therefore to go on doing projects until he can push out his budget constraint no farther. This is true no matter what his preferences are. The crucial point here is that the level of investment he should undertake does not depend on his preferences. This implies that his consumption and production decisions are separate. If you have $100 now and the interest rate is 10% per year, then you can invest the $100 and get $110 in a year's time. The future value of $100 in 1 year's time at 10% is $110. In general C1 = (1 + r)PV FV formula Another way of saying the same thing is that the present value of $110 in 1 year's time if the interest rate is 10% is $100. In general PV = C1 PV formula _____ 1 + r