Question

Biff is a consumer who lives for two periods and is endowed with some incomes (m1,...

Biff is a consumer who lives for two periods and is endowed with some incomes (m1, m2).

(a) Draw a picture of Biff’s intertemporal budget constraint. If the interest rate fell, would the slope of the budget line get steeper or flatter?

(b) If the interest rate were .05, Biff would borrow money in the first period. But Biff would lend money instead if the interest rate were .04. Could Biff’s preferences satisfy WARP? Explain.

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