Crusoe will live this period and the next period as the lone inhabitant of his island. His only income is a crop of 100 coconuts that he harvests at the beginning of each period. Coconuts not consumed in the current period spoil at the rate of 10 percent per period.
a. Draw Crusoe’s inter-temporal budget constraint. What will be his consumption in each period if he regards future consumption as a perfect, one- for-one substitute for current consumption?
b. What will he consume each period if he regards 0.8 unit of future consumption as being worth 1 unit of current consumption?