Question

3) Drawing the budget constraint in the Optimal Choice Model for consumption over time.
a) Suppose Abbie’s income (endowment) is all in the future (later) and equals $1,000. Draw the budget constraint showing the possible combinations of consumption now and consumption later if the interest rate equals 10% and if the interest rate equals 20%. What happens to the budget constraint and Abbie’s opportunity to consume now and later if the interest rate increases?

b) Suppose Bala’s income (endowment) is all in the present (now) and equals $1,000. Draw the budget constraint showing the possible combinations of consumption now and consumption later if the interest rate equals 10% and if the interest rate equals 20%. What happens to the budget constraint and Bala’s opportunity to consume now and later if the interest rate increases?

Answer 1