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I do not understand this question could you please explain and what formula do i use ? I u u. nullul.' 4 Question 1 Mr.

I do not understand this question could you please explain and what formula do i use ?

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I u u. nullul.' 4 Question 1 Mr. Baotou has an income stream (YmYl) : (100.50) and can borrow and lend at the interest rate 1' = 0.11. His preferences are represented by the additively separable utility function: 01\" 01\" 1 "_ n + 0.9 1 i n where the risk-aversion is given by the parameter 1} = 2. U100. Ci) = 1. Dene the marginal utility of consumption at t = 0 and t = 1, respectively. Dene the marginal rate of substitution between Co and Cl and explain its meaning. 2. Write down the consumer's intertemporal budget constraint and the rst order con- dition that must be satised by the optimal consumption stream. 3. Use the rst order condition and the consumer's inter-temporal budget constraint to nd the consumption stream (05, ;Cf} that maximizes utility. 4. How much will the consumer save at t = 0? Honr much will his savings be worth at t = 1? 5. Check that he can afford the optimal consumption Cf in t = 1

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