Consider the intertemporal consumption problem of Mr Cronus between two periods, say this year and next year. His utility function takes the form U (c1; c2) = pc1 +0:97pc2, where c1 and c2 are his consumption this and next year respectively. It can be shown (and you do not have to) that this utility function satises diminishing marginal rate of substitution. His yearly income is stable at 100 unit (let say a unit is ten-thousand). He faces di¤erent interest rates between borrowing and saving. Specically, the saving interest rate is 0:02, whereas the borrowing interest rate is 0:04. (a) Describe the budget set facing Mr Cronus. (b) Is Mr Cronus a borrower? Explain your answer. (c) Is Mr Cronus a saver? Explain your answer.

Consider the intertemporal consumption problem of Mr Cronus between two periods, say this year and next year. His utility function takes the form U (c1; c2) = pc1 +0:97pc2, where c1 and c2 are his consumption this and next year respectively. It can be shown (and you do not have to) that this utility function satises diminishing marginal rate of substitution. His yearly income is stable at 100 unit (let say a unit is ten-thousand). He faces di¤erent interest rates between borrowing and saving. Specically, the saving interest rate is 0:02, whereas the borrowing interest rate is 0:04. (a) Describe the budget set facing Mr Cronus. (b) Is Mr Cronus a borrower? Explain your answer. (c) Is Mr Cronus a saver? Explain your answer.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.1P

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