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.
(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_______?
This question was answered on: Jul 11, 2017
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