In a perfect capital market, consider the following two income streams (y_1, y_2) = (1500,1100) and (y*_1, y*_2)=(500,2200). Further assume that the market rate of interest is 10%.Suppose that income stream (y_1, y_2) lies on market opportunity line (L_1) and that market opportunity line L_2 lies to the right of L_1 and market opportunity line L_3 lies below L_1. On which market opportunity line will (y*_1, y*_2) lie *

L2

L3

On a curve between L1 and L2 since the average lies on a point higher than L1

L1

The optimal consumption standard of a rational individual is illustrated by the point of tangency between *

The transformation curve and the indifference curve

The utility indifference curve and the market opportunity line

The transformation curve and the market opportunity line

None of the above

If a consumer could not borrow or lend, his expenditures will be restricted to a combination *

On the same indifference curve of the optimal choice

On an indifference curve below that of the optimal choice

On an indifference curve above that of the optimal choice

Two of the above are correct

Suppose the interest rate is zero and the consumers utility is u(C1,C2,C3)=(C1,C2,C3), while the two incomes are (Y1,Y2,Y3)=(2500,100,1300). Find the optimal consumption in each period, also indicate which financial transactions the consumer makes. *

C1=2500, In year 2 save and in year 3 consume

Cannot be determined we need the utility function to optimize

C1=2500, C2=100, C3=1300

C1=2500, In year 2 borrow and in year 3 repay the debt

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