Question

Consider a consumer with preferences over current and future consumption given by U (c1, c2) =...

Consider a consumer with preferences over current and future consumption given by U (c1, c2) = c1c2 where c1 denotes the amount consumed in period 1 and c2 the amount consumed in period 2.

Suppose that period 1 income expressed in units of good 1 is m1 = 20000 and period 2 income expressed in units of good 2 is m2 = 30000. Suppose also that p1 = p2 = 1 and let r denote the interest rate.

1. Find the optimal consumption bundle when r=0.15. Is the consumer a saver or a borrower?

2. Let p1 = p2 = 1 and r = 0:2. Suppose the consumer is asked to choose between two bundles, (c1; c2) = (25; 16) and (c1; c2) = (9; 36): Which one would she choose?

3. suppose that (m1; m2)=(110; 100), p1 = 1, and r = 0: What are the inflation rates that make her be a saver and what are the ones that make her be a borrower?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a consumer with preferences over current and future consumption given by U (c1, c2) =...
Consider a consumer with preferences over current and future consumption given by U (c1, c2) = c1c2 where c1 denotes the amount consumed in period 1 and c2 the amount consumed in period 2. Suppose that period 1 income expressed in units of good 1 is m1 = 20000 and period 2 income expressed in units of good 2 is m2 = 30000. Suppose also that p1 = p2 = 1 and let r denote the interest rate. 1. Find...
utility function over consumption today (c1) and consumption tomorrow (c2): U(c1, c2) = log(c1) + blog(c2)...
utility function over consumption today (c1) and consumption tomorrow (c2): U(c1, c2) = log(c1) + blog(c2) where 0 < b < 1 and log denotes the natural logarithm Let p1 denote the price of c1 and p2 denote the price of c2. Assume that income is Y. Derive Marshallian demand functions for consumption today (c1) and consumption tomorrow (c2). What happens to c1 and c2 as b approaches 0? {Math hint: if y = log(x), dy/dx = 1/x}
Suppose that Jessica has the following utility, U = C1^1/2 C2^1/2 and that she earns $400...
Suppose that Jessica has the following utility, U = C1^1/2 C2^1/2 and that she earns $400 in the first period and $700 in the second period. Her budget constraint is given by C1 + C2/1+r = Y1 + Y2/1+r . The interest rate is 0.25 (i.e., 25%). She wants to maximize her utility. (a) What are her optimal values of C1 and C2? (b) Is Jessica a borrower or a saver in period 1? (c) Suppose the real interest rate...
Vanessa’s utility function is U(c1, c2) = c1/21 + 0.83c1/22, where c1 is her consumption in...
Vanessa’s utility function is U(c1, c2) = c1/21 + 0.83c1/22, where c1 is her consumption in period 1 and c2 is her consumption in period 2. In period 2, her income is 4 times as large as her income in period 1. At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)
Hira has the utility function U(c1; c2) = c11/2 +2c21/2 where c1 is her consumption in...
Hira has the utility function U(c1; c2) = c11/2 +2c21/2 where c1 is her consumption in period 1 and c2 is her consumption in period 2. She will earn 100 units in period 1 and 100 units in period 2. She can borrow or lend at an interest rate of 10%. Write an equation that describes Hira’s budget. What is the MRS for the utility function between c1 and c2? Now assume that she can save at the interest rate...
(Intertemporal Choice )Consider a consumer whose preferences over consumption today and consumption tomorrow are represented by...
(Intertemporal Choice )Consider a consumer whose preferences over consumption today and consumption tomorrow are represented by the utility function U(c1,c2)=lnc1 +?lnc2, where c1 and c2 and consumption today and tomorrow, respectively, and ? is the discounting factor. The consumer earns income y1 in the first period, and y2 in the second period. The interest rate in this economy is r, and both borrowers and savers face the same interest rate. (a) (1 point) Write down the intertemporal budget constraint of...
Consider a two-period economy consisting of people with identical preferences and identical endowments. There are two...
Consider a two-period economy consisting of people with identical preferences and identical endowments. There are two consumption goods, one for each period (C1 and C2); the goods have prices P1 and P2, respectively. The endowment of the first period is the same as the endowment for the second period. The preferences are of the form U(C1, C2) = ln(C1) + 0.99 * ln(C2) Let the number of people in this economy be 1. Let the endowment of C1,C2 be 1000,1000...
Consider the following 2-period model U(C1,C2) = min{4C1,5C2} C1 + S = Y1 – T1 C2...
Consider the following 2-period model U(C1,C2) = min{4C1,5C2} C1 + S = Y1 – T1 C2 = Y2 – T2 + (1+r)S Where C1 : first period consumption C2 : second period consumption S : first period saving Y1 = 20 : first period income T1 = 5 : first period lump-sum tax Y2 = 50 : second period income T2 = 10 : second period lump-sum tax r = 0.05 : real interest rate Find the optimal saving, S*
Consider the following consumption decision problem. A consumer lives for two periods and receives income of...
Consider the following consumption decision problem. A consumer lives for two periods and receives income of y in each period. She chooses to consume c1 units of a good in period 1 and c2 units of the good in period 2. The price of the good is one. The consumer can borrow or invest at rate r. The consumer’s utility function is: U = ln(c1) + δ ln(c2), where δ > 0. a. Derive the optimal consumption in each period?...
A consumer likes two goods; good 1 and good 2. the consumer’s preferences are described the...
A consumer likes two goods; good 1 and good 2. the consumer’s preferences are described the by the cobb-douglass utility function U = (c1,c2) = c1α,c21-α Where c1 denotes consumption of good 1, c2 denotes consumption of good 2, and parameter α lies between zero and one; 1>α>0. Let I denote consumer’s income, let p1 denotes the price of good 1, and p2 denotes the price of good 2. Then the consumer can be viewed as choosing c1 and c2...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT