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10 points, moderate) In this question, suppose households now learn about a global pandemic before they choose c1. If there had been no pandemic y1
10 points, moderate) In this question, suppose households now learn about a global pandemic before they choose c1. If there had been no pandemic y1 = y2 = 100, but now they know that y1 will fall by 20%, i.e., y1 = 80 and y2 = 100. Follow the previous steps and compute the new levels of c1 after you consider the drop in y1 in the intertemporal budget constraint. Does c1 decrease by more or less than y1, why? What happens to savings a = y1 c1? Explain graphically (by drawing an indierence curve and the intertemporal budget) what is going on. Provide intuition
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