Ophelia has income of M1 = 100 in period 1 and M2 = 20 in period 2. If she chooses to, she can either save
Ophelia has income of M1 = 100 in period 1 and M2 = 20 in period 2. If she chooses to, she can either save or borrow at an interest rate of i = 0.05 (so an interest rate of 5% per period). The rate of price ination between periods is 71' = 0 (so a 0% ination rate) and price of a unit of consumption in each period is normalized to 1 (so p1 = 132 = 1). Suppose that Ophelia's utility function over intertemporal consumption bundles is U(cl , Cg) = 111 cl + 1n Cg. (Notice that this utility function implies that: (i) Ophelia has diminishing marginal utility of consumption in each period and (ii) Ophelia does not discount the future at all relative to the present.) Which of the following statements accurately describes the composition of Ophelia's optimal intertemporal consumption bundle? Ophelia consumes in both periods, but consumes slightly more in period 1 than in period 2. Ophelia consumes in both periods, but consumes slightly more in period 2 than in period 1. Ophelia shifts all of her consumption to period 2, and therefore consumes nothing in period 1. Ophelia shifts all of her consumption to period 1, and therefore consumes nothing in period 2
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