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First, to find out the optimal consumption path, taking the interest rate as given and then to find out the equilibrium interest rate that will eliminate demand for saving and investment, taking the consumption path. Both times, the utility function will be the same: U = In(ct) + 0.9ln(ct+1) So the future counts 90% as much as the present. In Part 1, income each period is 100, and the interest rate is 20%. In Part 2, consumption in each period is 100-in other words, income each period is 100, but income isn't storable (it's "manna"), so you have to consume it or lose it. Answer the following questions. What is optimal consumption each period? In period t of this twoperiod world, will this person be borrowing or saving or neither?

First, to find out the optimal consumption path, taking the interest rate as given and then to find out the equilibrium interest rate that will eliminate demand for saving and investment, taking the consumption path. Both times, the utility function will be the same: U = In(ct) + 0.9ln(ct+1) So the future counts 90% as much as the present. In Part 1, income each period is 100, and the interest rate is 20%. In Part 2, consumption in each period is 100-in other words, income each period is 100, but income isn't storable (it's "manna"), so you have to consume it or lose it. Answer the following questions. What is optimal consumption each period? In period t of this twoperiod world, will this person be borrowing or saving or neither?

Calculus: Early Transcendentals
Calculus: Early Transcendentals
8th Edition
ISBN:9781285741550
Author:James Stewart
Publisher:James Stewart
Chapter1: Functions And Models
Section: Chapter Questions
Problem 1RCC: (a) What is a function? What are its domain and range? (b) What is the graph of a function? (c) How...
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First, to find out the optimal consumption path, taking the interest rate as given and then to find out the equilibrium interest rate that will eliminate demand for saving and investment, taking the consumption path. Both times, the utility function will be the same: U = In(ct) + 0.9ln(ct+1) So the future counts 90% as much as the present. In Part 1, income each period is 100, and the interest rate is 20%. In Part 2, consumption in each period is 100-in other words, income each period is 100, but income isn't storable (it's "manna"), so you have to consume it or lose it. Answer the following questions. What is optimal consumption each period? In period t of this twoperiod world, will this person be borrowing or saving or neither? %3D
Transcribed Image Text:First, to find out the optimal consumption path, taking the interest rate as given and then to find out the equilibrium interest rate that will eliminate demand for saving and investment, taking the consumption path. Both times, the utility function will be the same: U = In(ct) + 0.9ln(ct+1) So the future counts 90% as much as the present. In Part 1, income each period is 100, and the interest rate is 20%. In Part 2, consumption in each period is 100-in other words, income each period is 100, but income isn't storable (it's "manna"), so you have to consume it or lose it. Answer the following questions. What is optimal consumption each period? In period t of this twoperiod world, will this person be borrowing or saving or neither? %3D
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