Question 3) In a two-period world, a consumer's utility function is given by u(c1, c2) = ln(c1) + In(c2) where c1 and c2 are his consumption in the two periods. Denote his income in the two periods by m1 and m2 and the prevailing interest rate by r. (a) Derive the period-1 consumption function c1(r, m1, m2). (b) How much will this individual save in the first period if m1 = m2 = 220 and r = 25%? (c) Suppose the individual has an income of £220 in each period, and that the current prevailing interest rate is 20%. If there is an increase in the prevailing interest rate, we cannot predict how his behaviour will change because we do not know the relative strengths of the income and the substitution effects. True or false? Provide a graphical explanation that supports your claim.

Question 3) In a two-period world, a consumer's utility function is given by u(c1, c2) = ln(c1) + In(c2) where c1 and c2 are his consumption in the two periods. Denote his income in the two periods by m1 and m2 and the prevailing interest rate by r. (a) Derive the period-1 consumption function c1(r, m1, m2). (b) How much will this individual save in the first period if m1 = m2 = 220 and r = 25%? (c) Suppose the individual has an income of £220 in each period, and that the current prevailing interest rate is 20%. If there is an increase in the prevailing interest rate, we cannot predict how his behaviour will change because we do not know the relative strengths of the income and the substitution effects. True or false? Provide a graphical explanation that supports your claim.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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