7 Consider a model in which an individual lives only two periods. This person has diminishing marginal utility of consumption and receives an income of $20,000 in period 1 and an income of $5,000 in period 2. The private interest rate is 10 percent per period, and this person can borrow or lend money at this rate. Also assume that this person intends to consume all of his income over his lifetime. a. Give a hypothetical numerical example of what a person’s optimal consumption would be over these two periods. In answering this question, what assumptions did you make?
7 Consider a model in which an individual lives only two periods. This person has diminishing marginal utility of consumption and receives an income of $20,000 in period 1 and an income of $5,000 in period 2. The private interest rate is 10 percent per period, and this person can borrow or lend money at this rate. Also assume that this person intends to consume all of his income over his lifetime. a. Give a hypothetical numerical example of what a person’s optimal consumption would be over these two periods. In answering this question, what assumptions did you make?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
7
Consider a model in which an individual lives only two periods. This person has diminishing marginal utility of consumption and receives an income of $20,000 in period 1 and an income of $5,000
in period 2. The private interest rate is 10 percent per period, and this person can borrow or lend money at this rate. Also assume that this person intends to consume all of his income over his lifetime. a. Give a hypothetical numerical example of what a person’s optimal consumption would be over these two periods. In answering this question, what assumptions did you make?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education