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##### (Solution) - Nickleby has an income of 2 000 this year and he

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Nickleby has an income of \$2,000 this year, and he expects an income of \$1,100 next year. He can borrow and lend money at an interest rate of 10%. Consumption goods cost \$1 per unit this year and there is no inflation.

(a) What is the present value of Nickleby?s endowment? _______. What is the future value of his endowment? _______. With blue ink, show the combinations of consumption this year and consumption next year that he can afford. Label Nickelby?s endowment with the letter E.
(b) Suppose that Nickleby has the utility function U (C1, C2) = C1C2. Write an expression for Nickleby?s marginal rate of substitution between consumption this year and consumption next year. (Your answer will be a function of the variables C1, C2.)
(c) What is the slope of Nickleby?s budget line? _______. Write an equation that states that the slope of Nickleby?s indifference curve is equal to the slope of his budget line when the interest rate is 10%. _________. Also write down Nickleby?s budget equation. _________.
(d) Solve these two equations. Nickleby will consume ______ units in period 1 and _______ units in period 2. Label this point A on your diagram.
(e) Will he borrow or save in the first period? _____. How much_______?

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This question was answered on: Jul 11, 2017

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