Question
In: Economics
Romeo lives two periods, and he earns m1 =$10,000 in period 1 and m2 =$12,000 in...
Romeo lives two periods, and he earns m1 =$10,000 in period 1 and
m2 =$12,000 in period 2, respectively. His utility function is u(c1; c2) = c1*c2.
Answer the following questions.
(a) Suppose that market interest rate is 50% (r = 0:5). Write down
Romeo‘s budget constraint. How much does he save or borrow in period 1?
Calculate. Explain your answer. Draw a diagram, too.
(b) The interest rate goes down from 50% to 25%. What happens his
saving or borrowing? Calculate. Draw a precise diagram. Is this change good
news or bad news?
(c) Now, the interest rate further goes down from 25% to 0%. What
happens his saving or borrowing? Calculate. Draw a precise diagram. Is
this change good news or bad news? Do you notice something interesting?
Solutions
Rahul Sunny answered 1 month agoRelated Solutions
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