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Mandy has an income of $800 in period

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Mandy has an income of $800 in period 1 and will have an income of $500 in period 2. Her utility function is U(c1, c2) = c10.80c20.20, where c1 is her consumption in period 1 and c2 is her consumption in period 2. The interest rate is 25% (0.25), and there is no inflation.;What is Mandy?s optimal consumption in period 1?;What is Mandy?s optimal consumption in period 2?;If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,000 and her income in period 1 would remain $800;What is Mandy's new optimal consumption in period 1?;What is Mandy's new optimal consumption in period 2?;Explain, in words, what has happened.

 

Paper#26860 | Written in 18-Jul-2015

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