Explain everything. No assumptions!

1. Assume you live in two periods, t=1 and t=2. In t=1 your income is Y1, in t=2, Y2 > Y1. Your preference over time is: u(C1) + u(C2)

a. Assuming you cannot borrow, What is the consumption in t=1 and t= 2? Also plot the utility curve. Show everything graphically and explain.

b. Assuming you can borrow and save, what is the new budget constraint? What is the consumption in t=1 and t= 2? Show everything graphically and explain. Could the you be better off? Draw budget constraints such that for one of them you prefers to borrow and for the other you prefer to save.

c. Assuming you cannot borrow, but can borrow and immediately sell some MacGuffins , and in the next period, you must buy back the MacGuffins to return to the lender. Assume that MacGuffins trade at P1 > 0 in the first period, and is expected to trade at P2 in the second period. What is the new budget constraint.

d. Under what conditions on P2 would you borrow and then sell a MacGuffin? Would you be better off with this option?