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Mareko?s utility function is U(C1, C2) = 2C1C2,

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Question

(i) Mareko?s utility function is U(C1, C2) = 2C1C2, where C1 is his consumption of pineapple in period 1, and C2 is his consumption of pineapple in period 2. Mareko?s income is $100 in period 1 and $55 in period 2. Mareko can borrow or lend money between periods at an interest rate of 10%. There is no inflation.a. Write out Mareko?s intertemporal budget constraint in future value terms.b. How much pineapple will Mareko consume in each period?c. How much money will Mareko lend or borrow in the first period?d. What is the present value of Mareko?s consumption bundle?e. If the interest rate increases, will Mareko be better or worse off? Explain your answer with the aid of a diagram.

 

Paper#28050 | Written in 18-Jul-2015

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