6. A consumer with utility U(Co,C₁) = Co¹¹C₁ earns lo = 45,000 now and expects to earns 1₁ = 35,000 next year. They face interest rates r = 0.08 for borrowing and get paid rs = 0.04 for saving. Will they borrow or save in t = 0? How much? Do this problem two ways: a. Marginal-graphical, i.e. sketch their scenario and use marginal tradeoffs to explain how they get to their optimal bundle; and b. By setting up a Lagrangian to show which constraint(s) are binding and what bundle satisfies the Lagrangian's first-order conditions. [Note that you should get the same bundle using both approaches...]

6. A consumer with utility U(Co,C₁) = Co¹¹C₁ earns lo = 45,000 now and expects to earns 1₁ = 35,000 next year. They face interest rates r = 0.08 for borrowing and get paid rs = 0.04 for saving. Will they borrow or save in t = 0? How much? Do this problem two ways: a. Marginal-graphical, i.e. sketch their scenario and use marginal tradeoffs to explain how they get to their optimal bundle; and b. By setting up a Lagrangian to show which constraint(s) are binding and what bundle satisfies the Lagrangian's first-order conditions. [Note that you should get the same bundle using both approaches...]

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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