Question

The household with preferences represented by a utility function ln(c1) + .99 ln(c2) is endowed with y1 = 1 in period 1 and y2 = .5 in period 2. The interest rate on savings is equal to r = .02. i. Write the problem of the household and solve it. Plot the solution using the indierence curve (with the value of utility), budget constraint (with comments on its slope and intersections with the axes), and the initial endowment. ii. What happens to the optimal consumption bundle if the interest rate increases to r = .03? What are the values of the (Hicksian) substitution eect and the income eect for that change? iii. Compute the elasticity of intertemporal substitution for the optimal solution (for r = .02). What is the corespondence between the EIS and the change in the consumption bundle in response to the increase in the interest rate to r = .03?

Answer 1

Answer:

$222 \times 2222 \div yvbn$