Suppose that there are two possible investors with entirely different preferences. Think of A as an ant, who wishes to save for the future, and of G as a grasshopper, who would prefer to spend all his wealth on some ephemeral frolic, taking no heed of tomorrow. Suppose that each has a nest egg of exactly $150,000 in cash. G chooses to spend all of it today, while A prefers to invest it in the financial market. Both have access to a well-functioning, competitive financial market, in which they can borrow and lend at 7% interest rate.

Suppose that A and G are offered the opportunity to invest their $150,000 in a new business that a friend is founding. This will produce a one-off surefire payment of $160,000 next year.

What would the ant (A) and grasshopper (G) do ? Would they borrow or lend? How much, and when would each consume?

Multiple Choice

A would lend, consume 0 today and $160,500 next year

G would borrow, consume $149,533 today and 0 next year

G would borrow, consume $180,714 today and 0 next year

A would lend, consume 0 today and $160,000 next year