Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose that an individual gains utility from Consumption today (c1) and Consumption tomorrow (c2 ). There are only two periods - today and tomorrow. The

image text in transcribed

Suppose that an individual gains utility from Consumption today (c1) and Consumption tomorrow (c2 ). There are only two periods - today and tomorrow. The individual gains utility from consumption in each of these periods according to their utility function: U(c1,c2)=c11/2c21/2 Assume also that this individual has income in both periods. an income today (m1)=$100 and an income tomorrow (m2)=$200. An individual can always borrow $1 today, at the cost of $1(1+r) tomorrow, or can always save $1 today and receive $1(1+r) tomorrow. The interest rate (r) is equal to 20%. 15. Write down this individual's budget constraint. [1 point] 16. What is this individual's current utility-maximizing choice of c1 and c2 ? Show your work. [2 points] Suppose now that the interest rate increases to 40%. 17. What is this individual's new utility-maximizing choice of c1 and c2 ? How much of this change in c1 and c2 can be attributed to the substitution effect and how much to the income effect? Use the Hicksian Decomposition for these calculations. Show your work. [3 points] Suppose that an individual gains utility from Consumption today (c1) and Consumption tomorrow (c2 ). There are only two periods - today and tomorrow. The individual gains utility from consumption in each of these periods according to their utility function: U(c1,c2)=c11/2c21/2 Assume also that this individual has income in both periods. an income today (m1)=$100 and an income tomorrow (m2)=$200. An individual can always borrow $1 today, at the cost of $1(1+r) tomorrow, or can always save $1 today and receive $1(1+r) tomorrow. The interest rate (r) is equal to 20%. 15. Write down this individual's budget constraint. [1 point] 16. What is this individual's current utility-maximizing choice of c1 and c2 ? Show your work. [2 points] Suppose now that the interest rate increases to 40%. 17. What is this individual's new utility-maximizing choice of c1 and c2 ? How much of this change in c1 and c2 can be attributed to the substitution effect and how much to the income effect? Use the Hicksian Decomposition for these calculations. Show your work. [3 points]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Guidelines For Laboratory Quality Auditing

Authors: Donald C. Singer, Ronald P. Upton

1st Edition

0824787846, 978-0824787844

More Books

Students also viewed these Accounting questions