Consider a consumer with budget set over two periodst=0, and t=1.

Her income in the first period isI0=$1000, and in the second period isI1=1200.

(a) Let the interest rate on loans and savings be identical atr=20%.

Draw the budget set with consumption in first periodC0 on the horizontal axis and consumption in second periodC1 on the vertical axis.

(b) Write down the equation for the budget line.

(c) Let the interest rate on loans berb=20%.

Let the interest rate on savings bers=1%.

Draw the new budget set with consumption in first periodC0

on the horizontal axis and consumption in second periodC1

on the vertical axis.

(d) Write down the equation for the new budget line.