Seth could consume $120 next year if he saved all his current earnings. He expects to earn nothing next year. The intertemporal budget constraint for Seth is given by the equation C2 = 120 - 1.2C1 where C1 = possible consumption in year 1 and C2 = possible consumption in year 2. Assume that C1 is on the horizontal axis and C2 is on the vertical axis.
a. What is the present value of the total consumption available?
b. What is the market interest rate?
c. Seth will definitely consume zero in year 1 if his MRSC1 for C2 is less than __________at all points on his indifference curve.
d. Seth will definitely save nothing for next year if his MRSC1 for C2 is greater than ______at all points on his indifference curve.
e. Assuming Seth starts from a position where he earns all his income in the beginning of year 1, sketch Seth's intertemporal budget constraint and show one of his indifference curves for a case where he will save $20 for year two.