1. (40 marks) Tim has preferences over consumption in period 0 and 1 of the form...

1. Tim has preferences over consumption in period 0 and 1 of the form U(x, y) = xy, where x and y are Tim’s consumption in period 0 and 1 respectively. He has $15,000 in the bank now and is trying to decide between two different investment opportunities, A and B. A: invest $10,000 in period 0 and receive $20,000 in period 1. B: invest $2,000 in period 0 and receive $6,000 in period

1.

a. If Tim can borrow and lend at a rate of interest of 50 percent, which investment opportunity will he choose?
b. Given your answer in (a), how much will he consume in each period if the price of the good is $1 in both periods?

c. Given your answer in (a), how much will he consume in each period if the price in period 0 is $1 and the inflation is 20%?

d. Assuming that the price of consumption is $1 in both periods and the borrowing rate is 50% and the lending rate is 100%. Given your answer in (a), how much will he consume in each period？

Expert Solution

Rahul Sunny answered 1 year ago

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