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Anna has an income of $1000 this year, and she expects an income of $2500 next year. She can borrow and lend money at an
Anna has an income of $1000 this year, and she expects an income of $2500 next year. She can borrow and lend money at an interest rate of 10%. Consumption goods cost $1 per unit this year and there is no ination. a. What is the net present value of Anna's endowment? b. On a graph show the combinations of consumption this year and consumption next year that she can afford. Label Anna's endowment with the letter E. Write down Anna's budget equation. What is the slope of Anna's budget line? c. Suppose that Anna's utility function is U=C1C2 where the marginal rate of substitution is (.'2 / C 1. Sketch the indifference curve and nd the tangent point How much will Anna consume in each period? Will she borrow or save in the rst period? d. If the interest rate went up to 15%, will she save or borrow? How does the amount compare to your answer in part c
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