Question

If Lupita’s income at t=1(current period) is $150,000 and her income att=2(future period) will be $110,000.

a.Show algebraically and using a graph,what is Lupita’s possible maximum present consumption (at t=1), a.k.a.the Present Value of lifetime income, and possible maximum future consumption (at t=2), a.k.a. the Future Value of lifetime income,if the market interest rate between period t=1 and period t=2is 10%.

b.If Lupita chooses to save $50,000 at period t=1 (c1: present consumption), how much can she consume at period t=2 (c2: future consumption)?

c.Lupita’s friend, Samuel, faces the same intertemporal budget constraint as Lupita(same income at t=1, t=2 and same market interest rate). If Samuel chooses to consume $200,000 at period t=1 (c1: present consumption), how much can Samuel consume at period t=2 (c2: future consumption)?

d.Given Lupita and Samuel’s choices of present and future consumption, who is more impatient? Draw indifference curves for Lupita and Samuel.

Answer 1

Lupita's income at t=1 = $150,000

income at t=2 = $110,000