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Bob has preferences over consumption in period 0 and 1 of the form U(x, y) = xy, where x and y are Bob's consumption in
Bob has preferences over consumption in period 0 and 1 of the form U(x, y) = xy, where x and y are Bob's consumption in period 0 and 1 respectively. He has $15,000 in the bank now and is trying to decide between two different investment opportunities, A and B.
A: invest $10,000 in period 0 and receive $20,000 in period 1. B: invest $2,000 in period 0 and receive $6,000 in period 1.
- If Bob can borrow and lend at a rate of interest of 50 percent, which investment opportunity will he choose?
- Given your answer in (a), how much will he consume in each period if the price of the good is $1 in both periods?
- Given your answer in (a), how much will he consume in each period if the price in period 0 is $1 and the inflation is 20%?
- Assuming that the price of consumption is $1 in both periods and the borrowing rate is 50% and the lending rate is 100%. Given your answer in (a), how much will he consume in each period?
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