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Suppose that Meghan earns $2,000 this month, and $2,200 next month with a utility function over consumption...

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Economics

Suppose that Meghan earns $2,000 this month, and $2,200 nextmonth
with a utility function over consumption in these two periodsgiven
by U(C1, C2) = C1C2, where MUC1 = C2 and MUC2 = C1. Supposethat
the deposit interest rate is rL = 1%, while the creditinterest
rate is rB = 2% + x%, where x is 4.
a) Draw a graph with Meghan’s budget constraint for consumption inthis month
vs. next month.

b) Will Meghan borrow or save, or neither?
c) How will your answer change if the interest rates rL and rB bothincrease by 5
percentage points?

Answer & Explanation Solved by verified expert
4.1 Ratings (643 Votes)
Meghan earns 2000 this month and 2200 next month HenceY12000 and Y22200a Lets say the consumption in this month is C1 andconsumption in next month is C2Hence Meghans consumption in this month is C1 and lets say hesaves    See Answer
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