Question
6. Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt's will require that Ali spend the money before December 31, 2009. He
6. Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt's will require that
Ali spend the money before December 31, 2009. He has two spending options: He can either
spend the amount in 2008 or in 2009. Suppose this is Ali's only source of income and the interest
rate on loans or savings is 10 percent.
(a) How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend
in 2009 if he only consumes in 2009?
(b) What is the opportunity cost of consuming $1.00 in 2008 in terms of forgone consumption in
2009? Draw Ali's budget constraint and optimal consumption bundle, considering that the
spending in 2008 is measured along the horizontal axis.
(c) Ali decides to spend $6,000 in 2008 and $4,400 in 2009. Show this optimal consumption
bundle using a budget constraint and indifference curve diagram.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started