2. Suppose we divide an individual's life into two hypothetical periods - say, "young" and "old." Suppose that the individual earns income only when young (denoted by "I") and saves some of that income to consume when old ( earning interest rate, r, on saving). a. Construct the relevant budget line in a two-period ("intertemporal") choice model diagram. Label the horizontal and vertical intercepts appropriately. What is the slope of the budget line? b. Suppose the interest rate on savings falls. Can you tell what happens to optimal consumption when young? Justify your answer by adding appropriate indifference curves to your diagram.
2. Suppose we divide an individual's life into two hypothetical periods - say, "young" and "old." Suppose that the individual earns income only when young (denoted by "I") and saves some of that income to consume when old ( earning interest rate, r, on saving). a. Construct the relevant budget line in a two-period ("intertemporal") choice model diagram. Label the horizontal and vertical intercepts appropriately. What is the slope of the budget line? b. Suppose the interest rate on savings falls. Can you tell what happens to optimal consumption when young? Justify your answer by adding appropriate indifference curves to your diagram.
Chapter13: General Equilibrium And Welfare
Section: Chapter Questions
Problem 13.1P
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Transcribed Image Text:2. Suppose we divide an individual's life into two hypothetical periods - say, "young" and "old." Suppose that the
individual earns income only when young (denoted by "I") and saves some of that income to consume when old (
earning
interest rate, r, on saving).
a. Construct the relevant budget line in a two-period ("intertemporal") choice model diagram. Label the horizontal
and
vertical intercepts appropriately. What is the slope of the budget line?
b. Suppose the interest rate on savings falls. Can you tell what happens to optimal consumption when young? Justify
your
answer by adding appropriate indifference curves to your diagram.
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