Consider a consumer who lives 2 periods. She has initial real wealth of 0, current real income of 90, and future real income of 110. The real interest rate is 10% per period.
a. Find the consumer's P V LR.
b. Let c and c
f denote the current and future consumption, respectively. Write the equation for the consumer's budget constraint (using the given numerical values) and graph the budget line.
Suppose that the consumer's life-time utility is given as follows:
u(c; c f) = log c + log c f
where = 0:9 is the discount factor.
c. How much will she save and consume in the current period?
d. How will her current saving and consumption be affected by an increase of 19 in current income?
e. How will her current saving and consumption be affected if real interest rate rises to 25%?