In the two-period model of consumption, suppose that the first period income is $5,000 and the...

In the two-period model of consumption, suppose that the first period income is $5,000 and the second period income is $5,500 for both Jill and Jack. The interest rate is 10 percent. Jack’s lifetime utility function is ?1 + ?2 while Jill’s lifetime utility function is ?1 + 0.8?2.

1)Draw a graph that represents the common budget constraint that Jill and Jack face.

2)Draw indifference curves of Jill and Jack in separate graphs and compare the slopes of the indifference curves with the slope of the budget constraint curve.

3)Determine the optimal consumption in period 1 and 2, for both Jill and Jack.

4)If there is a borrowing constraint, whose consumption is affected by that?

Expert Solution

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Rahul Sunny answered 1 year ago

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