Question
Suppose you are given the utility function: In c' 4 U=In c +- Ci and the budget constraint: C - 1+r 1+r where y =
Suppose you are given the utility function: In c' 4 U=In c +- Ci and the budget constraint: C - 1+r 1+r where y = 100, y 120, and the interest rate r = 0.05. a) What is the optimal value of current consumption c*? b) What is the optimal value of future consumption, c*? c) Suppose the interest rate r -0.10. What is the new value of optimal current consumption c*? Suppose the new interest rate r = 0.10, what is the new optimal value of future consumption c? d) e) Given this information, is the consumer is a borrower or a lender? f) Given this information, which effect is larger, the substitution effect or the incomeeffect.
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