Given: Barbara has an income of $2000 this year, and she expects an income of $1100 next year. She can borrow and lend money at an interest rate of 10%. Consumption goods cost $1 per unit this year and there is no inflation. a. Suppose that Barbara’s utility function is U=C1C2 where the marginal rate of substitution is −?2/?1. Sketch the indifference curve and find the tangent point. How much will Barbara consume in each period? Will she borrow or save in the first period? b. If the interest rate went up to 20%: Will she save or borrow? How does the amount compare to your answer in part a?
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Given: Barbara has an income of $2000 this year, and she expects an income of $1100 next year. She can borrow and lend money at an interest rate of 10%. Consumption goods cost $1 per unit this year and there is no inflation.
a. Suppose that Barbara’s utility function is U=C1C2 where the marginal rate of substitution is −?2/?1.
Sketch the indifference curve and find the tangent point.
How much will Barbara consume in each period? Will she borrow or save in the first period?
b. If the interest rate went up to 20%:
Will she save or borrow?
How does the amount compare to your answer in part a?
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Anna has an income of $1000 this year, and she expects an income of $2500
next year. She can borrow and lend money at an interest rate of 10%.
Consumption goods cost $1 per unit this year and there is no inflation. What is the
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