Suppose Prakash has an income today of

$30,000, an expected income in period 2 of

$35,000, and initial wealth of $5,000. Prakash faces an interest rate of 5%.

a) Graph Prakash’s intertemporal budget line. Denote the values of C1 and C2 at the intersection points with the horizontal and vertical axis, respectively.

b) Identity the point on the intertemporal budget line at which Prakash has no money at the end of period 1 and is not borrowing from anyone.