Is the consumer a borrower or a lender in period 0?

a consumer with preferences over current and future consumption given by U(c c )= Co1/2 + 0.9c1 1/2 Show more a consumer with preferences over current and future consumption given by U(c c )= Co1/2 + 0.9c1 1/2 where c0 denotes consumption in period 0 and c1 is consumption in period 1. Suppose that period 0 income expressed in terms of c0 is 0 0 y p = 2000 and period 1 income expressed in terms of c1 is 1 1 y p = 3000. Suppose also that p0 = p1 = 1 and let r denote the rate of interest expressed as a proportion. a) Find the optimal consumption bundle [c0 c1] when r = 0.15 where r is the rate of interest expressed as a proportion. Is the consumer a borrower or a lender in period 0? b) Without undertaking any more calculations illustrate your answer to part a) and show the effect of a decrease in the rate of interest. Show less

QUICK QUOTE

Approximately 250 words