Question
Consider the two-period intertemporal model we discussed in chapter 9. The Consumer has the preferences represented by U(c, c0 ) = 2 ln(c) + ln(c
Consider the two-period intertemporal model we discussed in chapter 9. The Consumer has the preferences represented by U(c, c0 ) = 2 ln(c) + ln(c 0 ), where = 0.95 is the discounting factor. The consumer's income in the current period is y = 80, and income in the future period is y 0 = 90. She pays lump-sum taxes t = 10 in the current period and t 0 = 30 in the future period. The real interest rate is 20%. Suppose the consumer can borrow only up to 15 units of consumption good. Calculate the consumer's lifetime wealth, optimal choice of consumption each period, and saving. Show in a diagram with the consumer's budget constraint and indifference curve. In the graph, show whether this consumer is a borrower or a lender.
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