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ECON 101B: Section 23 Handout
Date: 04/13/2011
Question 1
This exercise will guide you through the derivation and understanding of Irving Fisher model of intertemporal
consumption choice.
Suppose that a representative consumer lives for two periods and receives an endowment (income not
related to labor market participation)
Y
1
= $100
Y
2
= $110
in the second period. The
r
= 10%
. The consumer±s
preferences between consumption in period one,
C
1
, and that in period two,
C
2
, are represented by the
following utility function.
U
(
C
1
; C
2
) = ln
C
1
+
ln
C
2
1. What is the consumer±s budget constraint?
2. What does this parameter
tell us? What is the set of values, in your opinion, that
can take?
3. Write down the optimization problem the consumer faces and derive the restriction on consumption in
two periods necessary to maximize the consumer±s utility.
4. Suppose
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