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Unformatted text preview: mpose a Cobb-Douglas utility function).
$50,000; B. Suppose that $53,500; 0.12; 0.5; 1; 1.05 B1) What is the present value of the consumer’s income? What is the future value of her income?
PV: FV: = = =$97,767.86 . . $ , B2) Solve for the consumer’s optimal quantities of and . Interpret the value of , that is what does
tell you about her preferences for consumption today versus consumption tomorrow?
, . . , .
Since , . . . , this consumer places greater value on consumption today relative to consumption tomorrow.
B3) What is her utility at the optimum?
, , . . . , , B4) Is she a saver or borrower? How much does she save or borrow?
She is a borrower; her period one expenditures on consumption exceed her period 1 income. – ,
– this is the amount she borrows
B5) How much income does she have to purchase consumption in period 2 as a result of her
savings/borrowing decision? , . , ∗ B6) How much does she earn/pay in interest? . $ . , . $ . She pays this much in interest.
Suppose that as a result of poor credit history, she no longer has access to credit (she cannot borrow, but
she can still save,
B7) How does this affect her consumption in each period? What is her utility now? Is she better or
worse off t...
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- Fall '07