Suppose there are two agents Richy and Poory. Both of the live for two periods: Today...

Suppose there are two agents Richy and Poory. Both of the live for two periods: Today and Tomorrow. However, while Richy receives 100K$ Today and 0$ Tomorrow, Poory receives 0$ Today and 100K$ Tomorrow. Richy and Poory have the same preferences. Each of them prefers to smooth consumption perfectly, that is to consume the same amount in both periods. Any deviation from perfect consumption smoothing does not add any extra utility to Richy or Poory.

Draw Richy and Poory’s indifference curves in the space (Consumption Today, Consumption Tomorrow).

Expert Solution

By smoothening the income level across periods, both Richy and Poory would be able to smoothen the consumption. Thus indifference curve would be like complements. It will give equal importance to both periods.

Date... Richy receives and look & today o & Tomonton os today 100k & Tomorrow. monon Poory receives Richy and Poory have preferences. They prefer consuming same amount in both periods. Indifference curves of Bichy and Pooy :- ATT TETT crossoney normonmonas 4 Consumption today CScanned with CamScanner

Rahul Sunny answered 7 months ago

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