1. The individual faces a budget constraint in period 1 of Pīc1+81 2 budget constraint of P,C2 = (1+r)s1. Interpret each of these two constraints in =Y and a period words.
1. The individual faces a budget constraint in period 1 of Pīc1+81 2 budget constraint of P,C2 = (1+r)s1. Interpret each of these two constraints in =Y and a period words.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![The individual's total happiness is measured by the sum of period utility across time,
u(c1) + u(c2). Let u(c) be an increasing function that is strictly concave in the amount
of consumption c enjoyed by the individual. Also assume that the function u(c) satisfies
the Inada condition lim→0 u' (c)
utility function u(c) with respect to c.
= ∞ where u'(c)
du(c)
is the first-derivative of the
dc
1. The individual faces a budget constraint in period 1 of Pcı+s1 = Y and a period
2 budget constraint of P2C2 = (1+r)s1. Interpret each of these two constraints in
words.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2b714a0e-b01f-49d4-9d2a-b07b3adf1f36%2Fd642ad99-12e3-4a3b-a851-25b96bb7f871%2F2re93ce_processed.png&w=3840&q=75)
Transcribed Image Text:The individual's total happiness is measured by the sum of period utility across time,
u(c1) + u(c2). Let u(c) be an increasing function that is strictly concave in the amount
of consumption c enjoyed by the individual. Also assume that the function u(c) satisfies
the Inada condition lim→0 u' (c)
utility function u(c) with respect to c.
= ∞ where u'(c)
du(c)
is the first-derivative of the
dc
1. The individual faces a budget constraint in period 1 of Pcı+s1 = Y and a period
2 budget constraint of P2C2 = (1+r)s1. Interpret each of these two constraints in
words.
![Consider the problem of an individual that has Y dollars to spend on consuming over
wo periods. Let c1 denote the amount of consumption that the individual would like
co purchase in period 1 and c2 denote the amount of consumption that the individual
would like to consume in period 2. The individual begins period 1 with Y dollars and
can purchase ci units of the consumption good at a price P and can save any unspent
wealth. Use s1 to denote the amount of savings the individual chooses to hold at the end
of period 1.
Any wealth that is saved earns interest at rate r so that the amount of wealth the
ndividual has at his/her disposal to purchase consumption goods in period 2 is (1+r)s1.
This principal and interest on savings is used to finance period 2 consumption. Again,
for simplicity, we can assume that it costs P2 dollars to buy a unit of the consumption
good in period 2.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2b714a0e-b01f-49d4-9d2a-b07b3adf1f36%2Fd642ad99-12e3-4a3b-a851-25b96bb7f871%2Fbw41kh_processed.png&w=3840&q=75)
Transcribed Image Text:Consider the problem of an individual that has Y dollars to spend on consuming over
wo periods. Let c1 denote the amount of consumption that the individual would like
co purchase in period 1 and c2 denote the amount of consumption that the individual
would like to consume in period 2. The individual begins period 1 with Y dollars and
can purchase ci units of the consumption good at a price P and can save any unspent
wealth. Use s1 to denote the amount of savings the individual chooses to hold at the end
of period 1.
Any wealth that is saved earns interest at rate r so that the amount of wealth the
ndividual has at his/her disposal to purchase consumption goods in period 2 is (1+r)s1.
This principal and interest on savings is used to finance period 2 consumption. Again,
for simplicity, we can assume that it costs P2 dollars to buy a unit of the consumption
good in period 2.
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