Problem 4 Costless Magical MacGuffin Consider a consumer that lives only for two periods He works in period 1 (and gets income Y 1) and moves up the corporate ladder in period 2 (and gets income Y1 Y2 ) This consumer has the usual preferences over time u ( C 1) u ( C 2) Assume this consumer cannot borrow What is the consumption in period 1 and period 2 Display graphically Show the corresponding utility curve Assume that now the consumer is allowed to save or borrow Write down the new budget constraint What is the consumption in period 1 and period 2 Display graphically Could the consumer be worse off Could the consumer be better off Draw budget constraints such that for one of them consumer prefers to borrow and for the other prefers to save Assume once again that a consumer cannot borrow, but can borrow and immediately sell some MacGuffins, and in the next period, the consumer must buy back the MacGuffins to return to the lender Assume that MacGuffin trades at P 1 0in the first period and is expected to trade at P 2in the second period Write down the new budget constraint Would a consumer borrow a MacGuffin What is the condition on the P 2 Is P 2a fair price of a MacGuffin Could the consumer be better off with a MacGuffin

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Problem 4 - Costless Magical MacGuffin Consider a consumer that lives only for two periods. He works in period 1 (and gets income Y 1)

Problem 4 - Costless Magical MacGuffin

Consider a consumer that lives only for two periods. He works in period 1 (and gets incomeY1) and moves up the corporate ladder in period 2 (and gets incomeY1< Y2). This consumer has the usual preferences over time:u(C1) +u(C2)

Assume this consumer cannot borrow. What is the consumption in period 1 and period 2? Display graphically. Show the corresponding utility curve.

Assume that now the consumer is allowed to save or borrow. Write down the new budget constraint. What is the consumption in period 1 and period 2? Display graphically. Could the consumer be worse off? Could the consumer be better off? Draw budget constraints such that for one of them consumer prefers to borrow and for the other - prefers to save.

Assume once again that a consumer cannot borrow, but can borrow and immediately sell some MacGuffins, and in the next period, the consumer must buy back the MacGuffins to return to the lender. Assume that MacGuffin trades atP1>0in the first period and is expected to trade atP2in the second period. Write down the new budget constraint. Would a consumer borrow a MacGuffin? What is the condition on theP2? IsP2a fair price of a MacGuffin? Could the consumer be better off with a MacGuffin?