Econ 100A/Summer 09
Discussion #3
1.
Henry has a utility function
}
,
min{
)
,
(
2
1
2
1
c
c
c
c
u
. If he had an income of
$600 in period 1 and $1,400 in period 2 and if the interest rate were 0.20,
how much would Henry choose to spend on consumption in period 1?
(a)
10,600/11
(b)
10,000/11
(c)
10,100
(d)
10,000
Answer: (a)
2.
Jenny is always indifferent between a unit of consumption today and
tomorrow and the interest rate is 5%.
(a)
Her intertemporal indifference curve is horizontal
(b)
Her intertemporal indifference curve is a straight line with slope 1.
(c)
She will spend all of her current and future income on consumption
today.
(d)
She will spend 5% more on consumption today than on consumption
tomorrow.
(e)
She will spend 5% more on consumption tomorrow than on
consumption today.
Answer: (b)
3.
Mark has income $400 in period 1 and income $600 in period 2. His utility
function is
a
a
c
c
, where
a
= 0.40 and the interest rate is 0.20. If
his income in period 1 doubled and his income in period 2 stayed the same,
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 Summer '07
 Babcock
 Supply And Demand, Utility, Yoram

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