Steve has the utility function U(ci, c2) = c + 2c/where ci is his consumption in period 1 and ci is his consumption in period 2. He will earn 100 units of the consumption good in period I and 100 units of the consumption good in period 2. He can borrow or lend at an interest rate of 10%. Write an equation that describes Steve's budget constraint and explain how you find it. If Steve neither borrows nor lends, what will be his marginal rate of substitution between current and future consumption? Show your calculation. If Steve does the optimal amount of borrowing or saving, what will be the ratio of his period 2 consumption to his period 1 consumption? Explain your answer.

Steve has the utility function U(ci, c2) = c + 2c/where ci is his consumption in period 1 and ci is his consumption in period 2. He will earn 100 units of the consumption good in period I and 100 units of the consumption good in period 2. He can borrow or lend at an interest rate of 10%. Write an equation that describes Steve's budget constraint and explain how you find it. If Steve neither borrows nor lends, what will be his marginal rate of substitution between current and future consumption? Show your calculation. If Steve does the optimal amount of borrowing or saving, what will be the ratio of his period 2 consumption to his period 1 consumption? Explain your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Steve has the utility function U(ci, c2) = c2 + 2c/2where ci is his consumption in period 1 and ci is his
consumption in period 2. He will carn 100 units of the consumption good in period I and 100 units of the
consumption good in period 2. He can borrow or lend at an interest rate of 10%.
Write an equation that describes Steve's budget constraint and explain how you find it.
If Steve neither borrows nor lends, what will be his marginal rate of substitution between current and future
consumption? Show your calculation.
If Steve does the optimal amount of borrowing or saving, what will be the ratio of his period 2 consumption to
his period 1 consumption? Explain your answer.

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