Microeconomics questions

1 Intertemporal budgets Dwight works for a paper company. He has a two-year contract with his rm. This year the rm will pay him on dollars. Next year, he will get m2 dollars. Dwight loves beets - in fact, beets are all he consumes. He would like to consume beets now, as well as in the future. Denote his current consumption of beets by c1 and his next period consumption by :32. One tonne of beets cost p dollars, whether he bum them this year or the next. Dwight also has access to a savings bank account, where he can save money at 1 end of the rst year. Denote his savings by 5. He gets an interest of (100 x r) % f for every dollar saved today, he gets (1 + 1') dollars next year. (a) Given that Dwight saved 3 at the end of the rst period, what is his bud; Ki line in the second period? 0 2:0 2 (b) With the understanding that Dwight might be borrowing from his future in- come, what is his budget line for the rst period? Dwight is an upstanding citizen - he will not cheat the bank. Therefore, savings is just negative harrowing. (c) Use this idea to combine the two budget lines into one budget line. [Hintz The combined \"intertemporal\" budget line should not have any terms containing b or 5.] (d) What is the price consumption today, relative to consumption tomorrow? (e) (Harder question) Suppose Dwight's contract lasted T periods, T 2 3. Denote consumption in period t by ct, and the income in period t as m1. Write down the budget line. [Hintz Use the same idea as above - net present value of consumption must equal net present value of income]