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.