Econ402_Set3 - PS 3 Consumption, Savings and Investment (60...

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PS 3 – Consumption, Savings and Investment (60 raw points) ECON 402, Prof. Bachmann Due: February 03 Explain all your answers. “Results only” means partial credit only. Staple and write legibly. No spiral stuff. Write on the top of the front page of the assignment you hand in: name, section number, section time and section GSI. The numbers in brackets are the subdivision of raw points for each question. I) Credit Constraints in the Intertemporal Consumption Model (25 raw points) This question deals with Alex, a young and smart college student, whose good grades got him a high- paying sales job after his senior year. He is promised $5,000 a month, but makes currently $500 a month at his lousy student job. Assume that these salaries are all net of taxes. Also, assume that the months before starting the job can be viewed as one period (today) and the months after starting the job can be viewed as another period (tomorrow). At the ongoing interest rate for deposits, Alex now spends all his income on everyday consumption. He would like to throw a big party for all his friends before graduation, but his credit card limit is exhausted and his bank refuses to give him a loan. That
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This note was uploaded on 03/13/2009 for the course ECON 402 taught by Professor House during the Winter '08 term at University of Michigan.

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Econ402_Set3 - PS 3 Consumption, Savings and Investment (60...

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