# PS%204 - FIN 501 Problem Set#4 Due Thursday October 7 2010...

This preview shows pages 1–2. Sign up to view the full content.

FIN 501 Problem Set #4 Due Thursday, October 7, 2010 For all problems show your work. Please include the names of your group members on your write-up as well as your section. 1. Suppose that an individual in Japan has preferences represented by the following utility function: ) ln( 1 1 ) ln( ) , ( 1 0 1 0 C C C C U Consumption is measured in yen, and the subscripts represent this period (0) and next (1). For simplicity, assume that the individual lives only two periods. She begins with wealth of 5 million yen, and has no labor income. Suppose this individual's rate of time preference δ is equal to 2%. Suppose the real interest rate in Japan is 2% per year. a. Set up and solve this individual's utility maximization problem. Find the optimal amount of consumption for this individual in each period. b. Suppose, instead, that the interest rate is 4%. What happens to the optimal value of C 0 ? Therefore, what happens to the amount of the initial wealth that this person saves for period 1?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

### Page1 / 2

PS%204 - FIN 501 Problem Set#4 Due Thursday October 7 2010...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online