Abdi’s incomes in periods 1 and 2 are $200 and $100 respectively. His preferences for consumption in the two periods are perfect complement. That is, for each dollar he spends in one period, he wants to spend the same amount in other period. The market interest rate is 10% between the two periods.
(a) What is the equation for Abdi’s intertemporal budget constraint?
(b) On a diagram, draw Abdi’s budget constraint and indifference map. Label your diagram clearly.
(c) Locate Abdi’s optimal consumption bundle in your diagram. Is he a saver or a borrower?
(d) If the market interest rate is lowered to 5%, what is the effect on Abdi’s consumption choice?