Answered step by step
Verified Expert Solution
Link Copied!

Question

...
1 Approved Answer

Ophelia has income of M1 = 100 in period 1 and M2 = 20 in period 2. If she chooses to, she can either save

image text in transcribed
image text in transcribed
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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials of Business Law

Authors: Anthony Liuzzo

9th edition

978-0078023194

Students also viewed these Economics questions