Paul values consumption in period 0 (co) and in period 1 (Cl) using u = In(co) + 0.8 In(cl). Paul can save or borrow at the interest rate r = 0.10. Denote net saving in period 0 by so.

Paul's income in period 0 (yo) is 80 while that in period 1 (Yi) is 110. Paul does not pay

any taxes.

a)Explain why it is not optimal for Paul to choose the consumption plan co = yo and Cl = UI. Illustrate with a graph.