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Can someone help me with this question?

Suppose that a consumer has utility of the form u(c) = ln (c).

Suppose that this consumer gets 2 units

of income in the first period and 4 units in the second period.

(a) Derive his intertemporal budget constraint (ITBC), set up the utility maximization problem and

derive the Euler equation. Then use the Euler equation and the ITBC to solve for his optimal

consumption and saving functions.

(b) Suppose also that beta = 1 and 1 + r = 1. Solve for his consumption and saving each period.

(c) Suppose instead that beta = 0 and 1 + r = 1. Solve for his consumption and saving each period.

(d) Based on your answers to b) and c), which agent is richer at the beginning of the second period?

How is this related to beta?

Top Answer

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Con = 0
S = YI - C* = 2 -6=-4.
d. ) Agent when B= 1 is Relatively Richer at
second period,
as B falls, then congn in and period & current
saving falls

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