Judy lives for two-periods. Her utility from consumption in periods 1 and 2 is given by U(Cı,C2)=C;(10-NY1"C2{N+1Y11_She has income mi and m2 in periods 1 and 2 respectively and no initial wealth. The interest rate is r. There is no inflation. a) Find Judy's optimal choice of consumption in period 1 and 2 expressed in present value. b) What is Judy's consumption in each period if m; = £260, m2 = £110 and r = 0.1? Is Judy saving or borrowing? c) Suppose the interest rate increases to r' = 0.2. What would be Judy's consumption in each period? Does she borrow/save more or less than before? Is she now worse off or better off than before?

Judy lives for two-periods. Her utility from consumption in periods 1 and 2 is given by U(Cı,C2)=C;(10-NY1"C2{N+1Y11_She has income mi and m2 in periods 1 and 2 respectively and no initial wealth. The interest rate is r. There is no inflation. a) Find Judy's optimal choice of consumption in period 1 and 2 expressed in present value. b) What is Judy's consumption in each period if m; = £260, m2 = £110 and r = 0.1? Is Judy saving or borrowing? c) Suppose the interest rate increases to r' = 0.2. What would be Judy's consumption in each period? Does she borrow/save more or less than before? Is she now worse off or better off than before?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.1P

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