Thomas has income of $1500 today and $1000 tomorrow. He can lend and borrow at an interest rate of 10%. There is 10% inhalation. His preferences for inter temporal consumption are represented by the following utility function U (c1 ; c2 ) = c1 + c2 .
(a) Write down the equation for his inter temporal budget constraint (c1 is his consumption today and c2 is his consumption tomorrow), graph it and label his endowment and the intercepts on each axis.
(b) What is his optimal consumption bundle?
(c) If interest rates increases to 20%, what will be his new optimal consumption bundle? Is he better or worse o§?