Thank you for your solutions of questions 1-3. Please answer questions 4-5. Exercise 2 (The Saving Schedule). Consider a two-period economy populated by identicalhouseholds with preferences defined over consumption in period 1, C1, and consumption in period2, C,, and described by the utility functionAssume that households are endowed with Y, kilos of apples in period 1 and with Y, kilos of applesin period 2. Let P, and P, denote the price of apples in periods 1 and 2. Households can save (orborrow) at the nominal interest rate i. Let r denote the real interest rate, so that the gross real interestrate is 1 +r = P, P, (1 + i). Let St denote saving in kilos of apples.1. State the household's budget constraints in periods 1 and 2.2. Derive the household's intertemporal budget constraint in terms of C1, C2, Y1, Y,, and r.3. State the household's utility maximization problem.4. Find the optimal level of consumption in period 1, C,, in period 2, C2, and the associated levelof saving, S,. Express your answer in terms of Y,, Y,, and r.5. Now assume that output is 10 kilos of apples in both periods (Y, = Y, = 10) and that the realinterest rate is 0 percent (r = 0). Find C,, C2, and S1. (Your answer should be 3 numbers.) Finally,compute the same 3 numbers but under the assumption that the real interest rate is 10 percent (r0.1). Is saving increasing in r? Provide intuition.

The intertemporal choice theory states the manner in which a consumer’s present consumption…

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Thank you for your solutions of questions 1-3. Please answer questions 4-5.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.8P

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