Question 3

EXERCISE 3 Martina has the utility function u(c1,C2) = ci/g + %c;/2, where c, is the consumption in period 2' = 1, 2. Her income in period 1 is $100, and her income in period 2 will be $125. The price of the good is $1 in period 1, and 75 cents in period 2. She can borrow or lend at an interest rate of 10%. ( 1) Write an equation that describes Martina's budget constraint. (2) What is Martina's optimal consumption stream