Question 1 Are the following true or false? a. At an interest rate of 5% per year, the market value of 100 GBP per year forever is 5000 GBP. b. A rise in the interest rate increases the opportunity cost of current consumption. Thus, both those households that borrow and those that lend will reduce their current consumption. (Assume current consumption is a normal good.) c. In a world with two periods, Ms. Y has an endowment of 100 both in the first and in the second period. It then follows that the maximum amount she can consume in period 1 is 200. d. Compared to government bonds, bonds issued by small firms typically pay a higher rate of interest. Question 2 Are the following true or false? a. If credit markets are perfect, to find my optimal investment I only need to compare the net present value of the different investments that I can make, I do not need to also think about my plans for consumption. b. Even when credit markets are perfect, to find my optimal investment, I need to also think about my plans for consumption. After all, the timing of my consumption is important because different investments will generate income in different periods. c. When credit markets are imperfect and there are different rates for borrowing and lending, to choose optimal investments, all you need to do is compute two net present values for each investment, one underthe borrowing rate and one under the lending rate. Then you need to take the smallest of the two. d. When credit markets are imperfect I am limited in my ability to transfer income from one period to another. As a result, in this case, different investment opportunities will have different implications as to the possible consumption paths I might have. This is the reason that when credit markets are imperfect I cannot separate the decision of optimal investment from the decision of optimal consumption. Question 3 Are the following true or false? a. The model we use to analyse the optimal choice of consumption between two periods is very different from the model we use to analyze the optimal choice of a consumer between two goods. In particular, while in the model of a consumer it is clear what the price is, in our model of the optimal decision between consumption today and tomorrow, there is no price! b.The model we use to analyse the optimal choice of consumption between two periods is very different from the model we use to analyze the optimal choice of a consumer between two goods. In particular, the assumptions we make about the shape of preferences are very different between the two models, after all why would preferences over apples and bananas look like the individual's preferences for eating things today or tomorrow. c. The model we use to analyse the optimal choice of consumption between two periods is very similar to the model we use to analyze the optimal choice of a consumer between two goods. In particular, the assumptions we make about the shape of preferences are exactly the same in the two models and the type of analysis we do is very similar as well. d. The model we use to analyse the optimal choice of consumption between two periods is very similar to the model we use to analyze the optimal choice of a consumer between two goods. The only difference is that in the model of choice over the timing of consumption there are no substitution effects because the price is not really a price for different goods