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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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