7 3. Gabriel's Current income is m and future income is mg. The interest rate for borrowing...
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7
3. Gabriel's Current income is m and future income is mg. The interest rate for borrowing and lending is r. Current consumption of goods costs $1 per unit and there is no ination. Let c, and c3 denote Gabriel's current and future consumption, respectively. a. Formulate Gabriel's intertemporal budget constraint and interpret the slope. (20%) If CA > m,\" what is Gabriel's new consumption bundle if the interest rate increases to r' for both saving and borrowing? Use a diagram to explain the change and whether he is better off. (30%) With the use of an appropriate diagram, explain the Weak Axiom of Revealed Preference (WARP). (30%) Explain the concept of transitivity in preferences and how it relates to the Strict Axiom of Revealed Preference (SARP). (20%)
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