Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption:U(c1,c2)=c1+2/3c2, wherec1is consumption today, andc2is consumption tomorrow. Consumption tomorrow is less valued because people are impatient and prefer consuming now rather than later. Buying 1 unit of consumption today costs $1 today and buying 1 unit of consumption tomorrow costs $1 tomorrow. All individuals have income of $10 dollars today and no income tomorrow (because they will be retired) but they can save at the market interest rater0.

What is the price today of one unit of consumption tomorrow?

E1)Exemplify an expression for an individual's budget constraint in terms of today's and tomorrow's consumption expenditure. To verify that you have the correct answer, calculate the maximum you can consume today if you consume6.24 tomorrow and the interest rate is0.07.

c1=?

E2)Draw the indifference curve. (This is for your understanding. Your drawing will not be graded.)

How much of his or her income will an individual consume today given that the interest rate is 0.3?

a)Less than half of it

b)Exactly half of it

c)The individual is indifferent between consuming today and saving

d)More than half of it

e)All of it

f)None of it

E3)How much of his or her income will an individual consume today given that the interest rate is 0.5?

a)Less than half of it

b)The individual is indifferent between consuming today and saving

c)None of it

d)All of it

e)More than half of it

F) Exactly half od it

E4)How much of his or her income will an individual consume today given that the interest rate is 0.7?

a)Less than half of it

b)All of it

c)None of it

d)More than half of it

e)Exactly half of it

f)The individual is indifferent between consuming today and saving

E5)Suppose that in this economy all the funds for capital come from savings by the 10 individuals. Firms' demand for capital is given byQd=100100r.

What is the market supply for funds if the interest rate is 30%?

Qs=?

What is the market supply for funds if the interest rate is 70%?

Qs=?

What is aggregate consumption in each period at that interest rate?

C1=?

C2=?