Consider the following intertemporal consumption problem with one good and two periods. The quantity of the good consumed in period 1 and period 2 are q1 and q2. The price of each unit of the good is $1 in both periods. The consumer’s income is I1=10 in the first period and I2=12 in the second period. The consumer can borrow or save money at the interest rate of 50%, that is, r=0.50. The consumer’s utility function is u(q1,q2)= q1q2.The optimal choice of q1 is a. 9b. 10c. 11And the consumer will:d. borrow 1e. save 1f. borrow 2g, save 0

Above question presents an intertemporal choice problem in which a consumer optimizes its…

Answered: Consider the following intertemporal…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the following intertemporal consumption problem with one good and two periods. The quantity of the good consumed in period 1 and period 2 are q₁ and q₂. The price of each unit of the good is $1 in both periods. The consumer’s income is I₁=10 in the first period and I₂=12 in the second period. The consumer can borrow or save money at the interest rate of 50%, that is, r=0.50. The consumer’s utility function is u(q₁,q₂)= q₁q₂.

The optimal choice of q₁ is

a. 9

b. 10

c. 11

And the consumer will:

d. borrow 1

e. save 1

f. borrow 2

g, save 0

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