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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 interest
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 ofAnna'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 ofAnna'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 find the tangent point. How much will Anna consume in each period? Will she borrow or save in the first period? d. lfthe interest rate went up to 15%, will she save or borrow? How does the amount compare to your answer in part c? john Pigskin has a utility function ofthe form U = E. john is beginning his senior year of college football. If he is not seriously injured, he will receive a $1,500,000 contract for playing professional football. If any injury ends his football career, he will take a job as a refuse removal facilitator in his hometown that pays $30,000. There is an 8% chance that john will be injured badly enough to end his career. a. What is john's expected utility? b. How much would john be willing to pay to remove the nancial risk he faces? That is, what $p would he pay for a $1,500,000 insurance policy so that he would have $1,500,000-$p even if he had a serious injury? Assume he w0uldn't work for $30,000 if he had the insurance and he was injured. Hint: You should set his utility with certainty [U($1,500,000-$p]) equal to his expected utility with risk [found in part a] and solve for p
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