A consumer has utility u(x,y) = x^4 y^2 where x is this year’s consumption, and y is next year’s consumption. She makes 600 dollars income this year and 720 dollars income the next year. There is also a bank where she can borrow money at the interest rate r=%50 and lend money (to the bank) at the interest rate r=%20 (of course, she will decide to borrow or lend this year and pay off her debt or receive her savings the next year). a. Should she borrow money from or lend to the bank this year? How much b. If her utility were u(x,y) = xy2 instead, re-solving (a), would she borrow money or lend? How much? c. If her utility were u(x,y) = x^c y^2, what should “c” be so that she ends up neither borrowing nor lending?
A consumer has utility u(x,y) = x^4 y^2 where x is this year’s consumption, and y is next year’s consumption. She makes 600 dollars income this year and 720 dollars income the next year. There is also a bank where she can borrow money at the interest rate r=%50 and lend money (to the bank) at the interest rate r=%20 (of course, she will decide to borrow or lend this year and pay off her debt or receive her savings the next year).
a. Should she borrow money from or lend to the bank this year? How much
b. If her utility were u(x,y) = xy2 instead, re-solving (a), would she borrow money or lend? How much?
c. If her utility were u(x,y) = x^c y^2, what should “c” be so that she ends up neither borrowing nor lending?
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