3. Anya has a two-period horizon. She has the utility function u(c1, c2) = 2ln(cı) + In(c2), where c; is her consumption in period j. Her income is M¡ in period j. Assume that M1 = 7,000 and M2 = 9,600. The interest rate at which she can borrow and lend is 20%. %3D (i) Find the equation for Anya's budget line. (ii) Find her optimal bundle. (iii) Explain whether her utility would rise or fall if the interest rate were to fall slightly. (iv) Now suppose that the interest rate is again 20% and Anya has M1 = 0 and M2 = 18,000 Explain why her optimal bundles here and in (ii) are related as they are!
3. Anya has a two-period horizon. She has the utility function u(c1, c2) = 2ln(cı) + In(c2), where c; is her consumption in period j. Her income is M¡ in period j. Assume that M1 = 7,000 and M2 = 9,600. The interest rate at which she can borrow and lend is 20%. %3D (i) Find the equation for Anya's budget line. (ii) Find her optimal bundle. (iii) Explain whether her utility would rise or fall if the interest rate were to fall slightly. (iv) Now suppose that the interest rate is again 20% and Anya has M1 = 0 and M2 = 18,000 Explain why her optimal bundles here and in (ii) are related as they are!
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Just the Question 3 (IV) Please.
Transcribed Image Text:3. Anya has a two-period horizon. She has the utility function u(C1, c2) = 2ln(cı) + In(c2),
where c; is her consumption in period j. Her income is Mj in period j. Assume that M1 =
7,000 and M2 = 9,600. The interest rate at which she can borrow and lend is 20%.
%3D
%3D
(i) Find the equation for Anya's budget line.
(ii) Find her optimal bundle.
(iii) Explain whether her utility would rise or fall if the interest rate were to fall slightly.
= 18,000.
(iv) Now suppose that the interest rate is again 20% and Anya has M1 = 0 and M2 =
Explain why her optimal bundles here and in (ii) are related as they are
Expert Solution
Step 1
Given information
U=2lnC1+logC2
Interest rate=20%
Initially
M1=7000 and M2=9600
Income level changes
M1=0 and M2=18000
Step by step
Solved in 2 steps
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