1.(20 marks) Nancy, who earns $2000 this month and $3000 the next month, has a utility function given by

where is the value of consumption this month and is the value of consumption next month.Nancy's marginal utilities are MU₀=and MU₁=. Suppose the interest rate for borrowing is equal to the deposit rate of 10%.

a.Draw the graph of Nancy's intertemporal budget line.What is the slope?

b.Will Nancy borrow this month?

c.Now, assume that the deposit rate is 10%, but the borrowing rate is 20%.If Nancy's utility function is as in part a), , draw the new budget line and decide if Nancy will borrow, lend, or do neither.

d.What if the rate to borrow was 7.5% and deposit rate is 5%?