Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption: U (c1, c2) = c1 +C2, where ci is consumption today, and c2 is consumption tomorrow. Consumption tomorrow is less valued because people are impatient and prefer consuming now rather than later. Buying 1 unit of consumption today costs $1 today and buying 1 unit of consumption tomorrow costs $1 tomorrow. All individuals have income of $10 dollars today and no income tomorrow (because they will be retired) but they can save at the market interest rater> 0. How much of his or her income will an individual consume today given that the interest rate is 0.3? O. Less than half of it O. Exactly half of it O. The individual is indifferent between consuming today and saving O. More than half of it O. All of it O. None of it How much of his or her income will an individual consume today given that the interest rate is 0.5? O. Less than half of it The individual is indifferent between consuming today and saving O. None of it O. All of it O. More than half of it O. Exactly half of it Suppose that in this economy all the funds for capital come from savings by the 10 individuals. Firms' demand for capital is given by Qp = 100 – 100r. What is the market supply for funds if the interest rate is 30%? Qs = What is the market supply for funds if the interest rate is 70%? Qs = What is the equilibrium interest rate that clears the capital market? r = What is aggregate consumption in each period at that interest rate? C1 = C2 =

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption: U (c1, c2) = c1 +C2, where ci is consumption today, and c2 is consumption tomorrow. Consumption tomorrow is less valued because people are impatient and prefer consuming now rather than later. Buying 1 unit of consumption today costs $1 today and buying 1 unit of consumption tomorrow costs $1 tomorrow. All individuals have income of $10 dollars today and no income tomorrow (because they will be retired) but they can save at the market interest rater> 0. How much of his or her income will an individual consume today given that the interest rate is 0.3? O. Less than half of it O. Exactly half of it O. The individual is indifferent between consuming today and saving O. More than half of it O. All of it O. None of it How much of his or her income will an individual consume today given that the interest rate is 0.5? O. Less than half of it The individual is indifferent between consuming today and saving O. None of it O. All of it O. More than half of it O. Exactly half of it Suppose that in this economy all the funds for capital come from savings by the 10 individuals. Firms' demand for capital is given by Qp = 100 – 100r. What is the market supply for funds if the interest rate is 30%? Qs = What is the market supply for funds if the interest rate is 70%? Qs = What is the equilibrium interest rate that clears the capital market? r = What is aggregate consumption in each period at that interest rate? C1 = C2 =

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