Consider the limit commitment model we learned in Chapter 10. Suppose that there is limited commitment in the credit market and lenders use their homes (H) as collateral (mortgage loans). The price of homes is given by p in the future period and hence the future value of homes is pH. Homes are illiquid and cannot be sold in the current period. The consumers have y and y'units of income in the current and future periods. We assume the tax t and t'are zero and the interest rate is r for both borrowing and lending. Answer the following questions.

1. Use a figure with current and future consumptions c and c'on the horizontal and vertical axis and illustrate the lifetime budget constraint in the figure.

2.Explain what will happen to consumptions c and c'if the housing price p decreases. 6