5. Use Fisher's two-period intertemporal model of consumption to answer the following questions. C; and C: are the current and next period consumption, and Y; and Y2 are the current and next period income. The interest rate is r. a. Write down the intertemporal budget constraint. b. Illustrate the consumer's maximization problem using a graphical analysis (i.e., the indifference curve and budget constraint), assuming this consumer is a net borrower. Label her consumption and borrowing/saving decisions on the graph carefully. c. What happens to this consumer's intertemporal consumption decisions (C; and C) when the next period of income is expected to rise? d. What happens to this consumer's intertemporal consumption decisions (C and C) and her welfare when the interest rate increases instead? How does this effect depend on the substitution and income effects?
5. Use Fisher's two-period intertemporal model of consumption to answer the following questions. C; and C: are the current and next period consumption, and Y; and Y2 are the current and next period income. The interest rate is r. a. Write down the intertemporal budget constraint. b. Illustrate the consumer's maximization problem using a graphical analysis (i.e., the indifference curve and budget constraint), assuming this consumer is a net borrower. Label her consumption and borrowing/saving decisions on the graph carefully. c. What happens to this consumer's intertemporal consumption decisions (C; and C) when the next period of income is expected to rise? d. What happens to this consumer's intertemporal consumption decisions (C and C) and her welfare when the interest rate increases instead? How does this effect depend on the substitution and income effects?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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