Jerry wants to start his own business with $20, 000 in his bank account.
Given that the market borrowing and lending rate is 10%, and his expected production function is y2 = 220 * (sqrt of Initial Investment)
(1) where Initial investment is total funds Jerry invests in period 1, and y2 is his expected total cash flow generated in period 2.
a) What is the optimal amount Jerry should invest in his business in period 1?
b) According to a), what is the maximum consumption expenditure Jerry can afford in period 1?
c) According to a) and b), assuming that Jerry’s utility function is represented by: U(c1, c2) = c1c2 (2) how much consumption expenditures Jerry should make in period 1 and 2 so that his utility level is maximized?
d) Draw a graph that shows Jerry’s budget line, indifference curve, production curve, the optimal investment decision and consumption decision in both periods.