Two-period model where C1 and C2 are perfect substitutes

1. Draw the budget constraint with Y1 = 100, Y2 = 60, and r = 0:2.

2. Draw the indierence curves for the preference that is represented by the lifetime utility

function C1 + C2, where = 1. Do it for various levels of lifetime utility, such as 100, 150,

and 200.

3. Using the budget constraint and the indierence curves, determine the optimal values of C1

and C2. Does the household have positive consumption in both of the periods or only in one

of the two periods? Explain the result.

4. How does the result change when we change the value of to 0.5? Explain the result.