Question
In an isolated mountain village, the only crop is corn. Good harvests alternate with bad harvests. This year the harvest will be 1,000 bushels. Next
In an isolated mountain village, the only crop is corn. Good harvests alternate with bad harvests. This year the harvest will be 1,000 bushels. Next year it will be 150 bushels. There is no trade with the outside world. Corn can be stored from one year to the next, but rats will eat 25% of what is stored in a year. The villagers have Cobb-Douglas utility functions, U(c1, c2) = c1c2 where c1 is consumption this year, and c2 is consumption next year. (a) Use red ink to draw a "budget line," showing consumption possibilities for the village, with this year's consumption on the horizontal axis and next year's consumption on the vertical axis. Put numbers on your graph to show where the budget line hits the axes.
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