Web Problem Set 03 - RP, Labour-Leisure, Two-Period

5 mr lucky intends to spend a recent inheritance of

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Unformatted text preview: end a recent inheritance of $1,000 over the next two periods. He has no other source of income. Let x1 and x2 be two composite commodities: expenditure on consumption in this period and in the next period. Suppose that the rate of interest that Mr. Lucky can get on his savings is 25%; that is, for every $1 invested in this period, he will have $1.25 in the next period. What is Mr. Lucky's budget line? That is, what combinations of x1 and x2 does his inheritance allow him to have? What is the opportunity cost of consumption in the first (second) period in terms of foregone consumption in the second (first) period? 6. Mr. Lucky's cousin Not-So is broke, but his grandmother has left him an inheritance of $1250 in trust. Let x1 and x2 be two composite commodities: expenditure on consumption in this and the next period. The terms of the trust specify that he cannot have the money until the next period, but his banker will lend him money at a 25% interest rate (thereby frustrating his grandmother's intentions). For every $1 borrowed today, N...
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This note was uploaded on 08/04/2013 for the course ECO 200Y1Y taught by Professor Williamg.wolfson during the Fall '11 term at University of Toronto.

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