Consider the intertemporal consumption problem of Mr Cronus between two periods, say this year and next year. His utility function takes the form U (c1; c2) = pc1 +0:97pc2, where c1 and c2 are his consumption this and next year respectively. It can be shown (and you do not have to) that this utility function satis es diminishing marginal rate of substitution. His yearly income is stable at 100 unit (let say a unit is ten-thousand). He faces di¤erent interest rates between borrowing and saving. Speci cally, the saving interest rate is 0:02, whereas the borrowing interest rate is 0:04. (a) Describe the budget set facing Mr Cronus. (b) Is Mr Cronus a borrower? Explain your answer. (c) Is Mr Cronus a saver? Explain your answer.
Consider the intertemporal consumption problem of Mr Cronus between two periods, say this year
and next year. His utility function takes the form U (c1; c2) = pc1 +0:97pc2, where c1 and c2 are
his consumption this and next year respectively. It can be shown (and you do not have to) that
this utility function satis
es diminishing marginal rate of substitution.
His yearly income is stable at 100 unit (let say a unit is ten-thousand). He faces di¤erent interest
rates between borrowing and saving. Speci
cally, the saving interest rate is 0:02, whereas the
borrowing interest rate is 0:04.
(a) Describe the budget set facing Mr Cronus.
(b) Is Mr Cronus a borrower? Explain your answer.
(c) Is Mr Cronus a saver? Explain your answer.
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