intertemporal consumption

2. Savings, Borrowing and Income. A consumer lives for two periods and has utility function u(eo,cl). S/he receives income mo in period 0 and 1m in period 1. The real interest rate is r. The consumer has no other wealth. Let (cotcf) denote the consumer's optimal consumption choice. a. Draw a diagram of the consumer's budget set, labeling the regions over which the consumer is a borrower in period 0 or a saver in period 0. b. Suppose the interest rate, r, increases. Draw the new budget set. c. Describe the wealth effect associated with the increase in I. How does it depend on whether the consumer is a borrower or lender. d. Describe the substitution effect associated with an increase in r. Does it depend on whether the consumer is a net borrower or lender? e. Describe the impact of an increase in the interest rate r on the consumer's optimal choices of Co and C1 when (i) the consumer saves in period 0 and (ii) the consumer borrows in period 0. That is, for each one, explain whether it increases, decreases, remains the same, or it cannot be determined