Judy lives for two-periods. Her utility from consumption in periods 1 and 2 is given by U(Cı,C2)=C;(10-NY1"C2{N+1Y11_She has income mi and m2 in periods 1 and 2 respectively and no initial wealth. The interest rate is r. There is no inflation. a) Find Judy's optimal choice of consumption in period 1 and 2 expressed in present value. b) What is Judy's consumption in each period if m; = £260, m2 = £110 and r = 0.1? Is Judy saving or borrowing? c) Suppose the interest rate increases to r' = 0.2. What would be Judy's consumption in each period? Does she borrow/save more or less than before? Is she now worse off or better off than before?

Judy lives for two-periods. Her utility from consumption in periods 1 and 2 is given by U(Cı,C2)=C;(10-NY1"C2{N+1Y11_She has income mi and m2 in periods 1 and 2 respectively and no initial wealth. The interest rate is r. There is no inflation. a) Find Judy's optimal choice of consumption in period 1 and 2 expressed in present value. b) What is Judy's consumption in each period if m; = £260, m2 = £110 and r = 0.1? Is Judy saving or borrowing? c) Suppose the interest rate increases to r' = 0.2. What would be Judy's consumption in each period? Does she borrow/save more or less than before? Is she now worse off or better off than before?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

N=0

Problem 1
Judy lives for two-periods. Her utility from consumption in periods 1 and 2 is given by
U(C1,C2)=C;(10-N)Y1C2{N+1YI, She has income mị and m2 in periods 1 and 2 respectively and no
initial wealth. The interest rate is r. There is no inflation.
a) Find Judy's optimal choice of consumption in period 1 and 2 expressed in present
value.
b) What is Judy's consumption in each period if m, = £260, m2 = £110 and r = 0.1? Is
Judy saving or borrowing?
c) Suppose the interest rate increases to r' = 0.2. What would be Judy's consumption in
each period? Does she borrow/save more or less than before? Is she now worse off or
better off than before?

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