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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?

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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Question 6 Please 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 Y. 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? 6. Use Fisher's model of consumption to analyze an increase in second-period income. Compare the case in which the consumer faces a binding borrowing constraint and the case in which she does not.
Transcribed Image Text:Question 6 Please 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 Y. 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? 6. Use Fisher's model of consumption to analyze an increase in second-period income. Compare the case in which the consumer faces a binding borrowing constraint and the case in which she does not.
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