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Q7. A consumer lives for two periods. She maximises the lifetime utility function subject to a budget constraint (note: A1 is initial wealth) U=ln(C1)+1+ln(C2)&C1+1+rC2=A1+Y1+1+rY2 (a)
Q7. A consumer lives for two periods. She maximises the lifetime utility function subject to a budget constraint (note: A1 is initial wealth) U=ln(C1)+1+ln(C2)&C1+1+rC2=A1+Y1+1+rY2 (a) What is the first-order condition for consumption in this case? (b) Use the first-order condition to substitute for C2 in the budget constraint, and solve for C1. (c) Set =0 and investigate how Y1,A1,Y2, and r affect C1. Interpret the results. (d) Suppose that A1=Y1=Y2=100 and =r=0. What is consumption in period 1? (e) Suppose that A1=Y1=Y2=100 and r=0, and =0.10. What is consumption in period 1? Explain the difference compared with the previous case. Q7. A consumer lives for two periods. She maximises the lifetime utility function subject to a budget constraint (note: A1 is initial wealth) U=ln(C1)+1+ln(C2)&C1+1+rC2=A1+Y1+1+rY2 (a) What is the first-order condition for consumption in this case? (b) Use the first-order condition to substitute for C2 in the budget constraint, and solve for C1. (c) Set =0 and investigate how Y1,A1,Y2, and r affect C1. Interpret the results. (d) Suppose that A1=Y1=Y2=100 and =r=0. What is consumption in period 1? (e) Suppose that A1=Y1=Y2=100 and r=0, and =0.10. What is consumption in period 1? Explain the difference compared with the previous case
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