Assume that a consumer's utility function isU(c1,c2)=(c₁^p+c₂^p)^1/p with equal to -0.5, wherec1 denotes consumption in 2020, andc2 denotes consumption in 2021. The consumer's income in 2020 will be 20.000 dollars, in 2021 it will be 0 dollars: thus the consumer has to save part of his 2020 income to consume in 2021. The interest rate between the two periods is 10%.

a) Assume that the interest rate changes from 10% to 20%.

How much does the consumer consume in 2020 in this case?

b) How much does the consumer consume in 2021 in this case?

c) What is the substitution effect of this change in interest rate on 2020 consumption (using Hicksian decomposition)?