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: Suppose that the representative consumer’s preferences over current consumption (C) and future consumption (C 0...

: Suppose that the representative consumer’s preferences over current consumption (C) and future consumption (C 0 ) are given by the following utility function U(C, C0 ) = CC0β The market real interest rate is denoted by r and β > 0. 1. Write down the consumers’ budget constraint for the current and future period. 2. Using the equations in part (1), obtain the inter-temporal budget constraint. 3. Set up the consumer’s optimization problem using the Lagrangian approach. Next, derive the first-order conditions and determine the consumer’s optimal consumption in the current and future period. 4. Suppose that the real interest rate rises, determine the impact on current and future consumption

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Rahul Sunny answered 2 years ago
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