2. (20 marks) Jack has preferences over consumption in period 1 and 2 of the form

ux1, x2 2 x1

3/ 4

2

. The price of consumption is $1 in both periods. He has $6,000 in

the bank now and is trying to decide between two different investment opportunities, A

and B.

A: invest $5,000 in period 1 and receive $12,000 in period 2. B: invest $1,000 in period 1 and receive $3,000 in period 2.

a. If Jack can borrow and lend at a rate of interest of 50 percent, which investment opportunity will he choose? (Assume that Jack cannot invest more than $5000 if he chooses A, or $1000 if he chooses B.) Show your analysis

b. Given your answer in (a), how much will he consume in each period?

ux1, x2 2 x1

3/ 4

2

. The price of consumption is $1 in both periods. He has $6,000 in

the bank now and is trying to decide between two different investment opportunities, A

and B.

A: invest $5,000 in period 1 and receive $12,000 in period 2. B: invest $1,000 in period 1 and receive $3,000 in period 2.

a. If Jack can borrow and lend at a rate of interest of 50 percent, which investment opportunity will he choose? (Assume that Jack cannot invest more than $5000 if he chooses A, or $1000 if he chooses B.) Show your analysis

b. Given your answer in (a), how much will he consume in each period?

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