Milton is a young boy whose parents will give him an allowance of $15 today and an allowance of $15 tomorrow. Suppose Milton's preferences over spending today, x₁, and spending tomorrow, x₂, are represented by the utility function U(x1; x2) = x₁/ x₂^1/2. Given his utility function Milton's MRS_x1x2= 2x₂/x_1.

(a) Based on Milton's utility function, does he enjoy consumption more today or tomorrow? Explain. For parts (b) through (d), determine how much money Milton spends, saves and borrows in each period.

(b) Suppose there is no credit market, and also, that Milton's parents take back any money that Milton doesn't spend in each period (that is, he cannot save any money).

(c) Now assume the interest rate is 0, but Milton's parents allow him to save or borrow.

(d) Now suppose that Milton's parents decide to set up a credit market with interest rate

r = 0.25 so that he can borrow or lend as much as he wants at this interest rate.

(e) What interest rate r should Milton's parents pick if they want Milton to spend the same amount of money in period 2 as he spends in period 1?