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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.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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.
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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