Problem 3 - Should I become professional athlete? Suppose a consumer who has to decide if she wants to go to pro or not. If she does NOT go, she will get a low income in both periods, Y., Y. If she goes pro, she will get a higher wage in the first period r> T:. In the second period, she will have NO income (Y = 0) and, in addition, she will have to pay and extra amount S to sustain her fancy lifestyle in the second period. She has increasing and concave preferences over consumption in the two periods (C1 and C:) Consider first that she does not go pro 1. Write down the dynamic budget constraints 2. Derive the intertemporal budget constraint 3. Show graphically the budget constraint and the optimal consumption point in period 1 and 2. 1

Problem 3 - Should I become professional athlete? Suppose a consumer who has to decide if she wants to go to pro or not. If she does NOT go, she will get a low income in both periods, Y., Y. If she goes pro, she will get a higher wage in the first period r> T:. In the second period, she will have NO income (Y = 0) and, in addition, she will have to pay and extra amount S to sustain her fancy lifestyle in the second period. She has increasing and concave preferences over consumption in the two periods (C1 and C:) Consider first that she does not go pro 1. Write down the dynamic budget constraints 2. Derive the intertemporal budget constraint 3. Show graphically the budget constraint and the optimal consumption point in period 1 and 2. 1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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