Question
Suppose that there is limited commitment in the credit market but lenders are uncertain about the value of collateral. Each consumer has a quantity of
Suppose that there is limited commitment in the credit market but lenders are uncertain about the value of collateral. Each consumer has a quantity of collateral H but from the point of view of the lender, there is a probability a that the collateral will be worth p in the future period and probability 1 a that the collateral will be worthless in the future period. Suppose that all consumers are identical.
(a) Determine the collateral constraint for the consumer, and show the consumer's lifetime budget constraint in a diagram.
(b) How will a decrease in a affect the consumer's consumption and savings in the current period, and consumption in the future period? Explain your results.
please answer all question
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started