Fred is planning his consumption over two time periods. Fred's preferences for consumption in period and two can be represented by the following utility function: U(c₂,c₂) = C₁³ +(1+p)¹ C₂5, where is the subjective discount rate, and C₁,C₂ is consumption in the first and second period. Fred's income in the first period is y, and grows by g % from the first period to the second period. Fred has access to perfect financial markets. The rate of interest is /">0. (a) Derive Fred's demand functions for consumption in the two periods as functions of p,r, y and g. (b) Derive Fred's demand for borrowing/saving as a function of p,r, y and g. (c) Give a condition involving the relationship between r and g for when Fred will borrow and when he will save.

Fred is planning his consumption over two time periods. Fred's preferences for consumption in period and two can be represented by the following utility function: U(c₂,c₂) = C₁³ +(1+p)¹ C₂5, where is the subjective discount rate, and C₁,C₂ is consumption in the first and second period. Fred's income in the first period is y, and grows by g % from the first period to the second period. Fred has access to perfect financial markets. The rate of interest is /">0. (a) Derive Fred's demand functions for consumption in the two periods as functions of p,r, y and g. (b) Derive Fred's demand for borrowing/saving as a function of p,r, y and g. (c) Give a condition involving the relationship between r and g for when Fred will borrow and when he will save.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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