6. A consumer who lives for two periods has a standard Cobb-Douglas utility func- tion: ulc1,c2) = cfe, where c, = consumption in period t and a+B = 1. Her income in period one is I1 = 500 and I2 = 400, and she can lend or borrow at interest rate r = 0.2. (a) Find the optimal consumption demand. (b) What values of a, if any, makes the consumer a borrower? Interpret this result. (c) Suppose now that a = but that r is no longer 0.2. What values of r, if any, makes the consumer a borrower? Interpret this result.

6. A consumer who lives for two periods has a standard Cobb-Douglas utility func- tion: ulc1,c2) = cfe, where c, = consumption in period t and a+B = 1. Her income in period one is I1 = 500 and I2 = 400, and she can lend or borrow at interest rate r = 0.2. (a) Find the optimal consumption demand. (b) What values of a, if any, makes the consumer a borrower? Interpret this result. (c) Suppose now that a = but that r is no longer 0.2. What values of r, if any, makes the consumer a borrower? Interpret this result.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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