As a financial analyst at Citibank, you want to help your clients to determine how to the income and consumption over this year and next. Refer to the above graph. Point A is $5000 and Point B is $5700. The solid sloping line represents the opportunities for investment in the capital market. Suppose John Smith has $5,000 now available to support the consumption in periods 0 (now) and 1 (next year). John was offered the opportunity to invest up to $5000 in a startup business at 25% return. John wants to spend the equal amount this year and next. Please answer the following questions.

a. What is the market interest rate [x]? (sample answer: 18.42%)

b. How much will John Smith consume this period and next?

 

Chapter 1 $Next Year D Investment, Financing, and Consumption Decisions B F Problem 1. $ Now A C