In a certain economy that produces only one good, corn, people live two periods and seek...

In a certain economy that produces only one good, corn, people live two periods and seek to maximize the logarithmic utility function U = ln (C1) + ln (C2). There are 10 people. Each has after tax real income of 35,000 bushels in period 1 and 156,000 bushels in period 2. Business investment demand is 100,000 bushels of corn no matter what the real interest rate is (so the investment schedule is a vertical line).

A. Find period 1 saving per person as a function of the real interest rate in this economy. Show all work. Then pick some values for r, find the resulting value of savings for each r, and graph the savings function you have found.

B. Given that investment demand is, as noted, 100,000 bushels or 10,000 bu. per person, find the equilibrium real rate for this economy - the value of r that makes desired saving per person equal to investment per person.

Expert Solution

Rahul Sunny answered 2 years ago

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