Question 1

If the nominal interest rate is 3% and if prices fall by 2% per year, then the real rate of interest is approximately 5%.

Accepted Answer

A) True 
 B)False  False

Question 2

Luella has to pay an interest rate of 50% to borrow.She only gets an interest rate of 5% if she lends.She is currently endowed with $1,000 in period 1 and $1,050 in period 2.She considers two alternative investment projects.She can only choose one of them.For project A she would have to pay $500 in period 1 and would be paid back $630 in period 2.For project B, she would be paid $500 in period 1 and would have to pay back $525 in period 2.
a.Diagram her budget set if she chooses project A.Also show her budget if she chooses project B.
b.If she neither borrows nor lends, which project has the higher present value at the interest rate 50%? Which has the higher present value at an interest rate of 5%?
c.Draw indifference curves such that she should choose A.
d.With different preferences might she choose B?

Accepted Answer

b.B, A.
d.Yes.

Question 3

Will Wisp will live for exactly two periods.His utility function is U(c1, c2)= c1c2, where c1 is consumption in period 1 and c2 is consumption in period 2.He will have no income in period 2.His income in period 1 is $40,000.If the interest rate rises from 10 to 14%:

Accepted Answer

A) his savings will increase by 4% and his consumption in period 2 will increase. 
B) his consumption in both periods will increase. 
C) his consumption in both periods will decrease. 
D) his savings will not change but his consumption in period 2 will increase by $800. 
E) his consumption in period 1 will decrease by 14% and his consumption in period 2 will increase. 
A) his savings will increase by 4% and his consumption in period 2 will increase. 
B) his consumption in both periods will increase. 
C) his consumption in both periods will decrease. 
D) his savings will not change but his consumption in period 2 will increase by $800. 
E) his consumption in period 1 will decrease by 14% and his consumption in period 2 will increase. D

Question 4

If current and future consumption are both normal goods, an increase in the interest rate will necessarily

Accepted Answer

A) cause savers to save more. 
B) cause borrowers to borrow less. 
C) reduce everyone's current consumption. 
D) make everyone worse off. 
E) None of the above. 
A) cause savers to save more. 
B) cause borrowers to borrow less. 
C) reduce everyone's current consumption. 
D) make everyone worse off. 
E) None of the above.

Question 5

Patience has a utility function U(c1, c2)= c1/21 + 0.80c1/22, where c1 is her consumption in period 1 and c2 is her consumption in period 2.Her income in period 1 is twice as large as her income in period 2.At what interest rate will she choose to consume the same amount in period 1 as in period 2?

Accepted Answer

A) 0 
B) 0.25 
C) 0.13 
D) 0.50 
E) 0.38 
A) 0 
B) 0.25 
C) 0.13 
D) 0.50 
E) 0.38

Question 6

Will Wisp will live for exactly two periods.His utility function is U(c1, c2)= c1c2, where c1 is consumption in period 1 and c2 is consumption in period 2.He will have no income in period 2.His income in period 1 is $80,000.If the interest rate rises from 10 to 12%:

Accepted Answer

A) his savings will increase by 2% and his consumption in period 2 will increase. 
B) his savings will not change but his consumption in period 2 will increase by $800. 
C) his consumption in both periods will increase. 
D) his consumption in both periods will decrease. 
E) his consumption in period 1 will decrease by 12% and his consumption in period 2 will increase. 
A) his savings will increase by 2% and his consumption in period 2 will increase. 
B) his savings will not change but his consumption in period 2 will increase by $800. 
C) his consumption in both periods will increase. 
D) his consumption in both periods will decrease. 
E) his consumption in period 1 will decrease by 12% and his consumption in period 2 will increase.

Question 7

If the real rate of interest is 12% and the nominal rate of interest is 31%, then the rate of inflation must be about

Accepted Answer

A) 27.26%. 
B) 43%. 
C) 2.58%. 
D) 16.96%. 
E) 22%. 
A) 27.26%. 
B) 43%. 
C) 2.58%. 
D) 16.96%. 
E) 22%.

Question 8

Ophelia says, "If I could lend money at the rates I must pay to borrow, I would.And if I could borrow money at the rates I receive when I lend, I would again.But forsooth, although I spend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational.Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a different interest rate when she borrows than she gets when she lends.Explain what happens in words.

Accepted Answer

Ophelia's budget between current and fut

Question 9

If apples today are perfect substitutes for bananas today, then apples today must also be perfect substitutes for bananas tomorrow.

Accepted Answer

A) True 
 B)False

Question 10

Mr.O.B.Kandle has a utility function c1c2, where c1 is his consumption in period 1 and c2 is his consumption in period 2.He will have no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,

Accepted Answer

A) his savings would not change but his consumption in period 2 would increase by $2,450. 
B) his consumption in both periods would decrease. 
C) his consumption in both periods would increase. 
D) his savings would increase by 7% and his consumption in period 2 would also increase. 
E) his consumption in period 1 would decrease by 17% and his consumption in period 2 would also decrease. 
A) his savings would not change but his consumption in period 2 would increase by $2,450. 
B) his consumption in both periods would decrease. 
C) his consumption in both periods would increase. 
D) his savings would increase by 7% and his consumption in period 2 would also increase. 
E) his consumption in period 1 would decrease by 17% and his consumption in period 2 would also decrease.

Question 11

Harvey Habit has a utility function U(c1, c2)=min{c1, c2}, where c1 and c2 are his consumption in periods 1 and 2 respectively.Harvey earns $189 in period 1 and he will earn $63 in period 2.Harvey can borrow or lend at an interest rate of 10%.There is no inflation.

Accepted Answer

A) Harvey will save $60. 
B) Harvey will borrow $60. 
C) Harvey will neither borrow nor lend. 
D) Harvey will save $124. 
E) None of the above. 
A) Harvey will save $60. 
B) Harvey will borrow $60. 
C) Harvey will neither borrow nor lend. 
D) Harvey will save $124. 
E) None of the above.

Question 12

Harvey Habit has a utility function U(c1, c2)=min{c1, c2}.If he had an income of $880 in period 1 and $1,320 in period 2 and if the interest rate were 0.20, how much would Harvey choose to spend on bread in period 1?

Accepted Answer

A) $1,620 
B) $360 
C) $540 
D) $2,160 
E) $1,080 
A) $1,620 
B) $360 
C) $540 
D) $2,160 
E) $1,080

Question 13

Ymir Larson farms near Niffleheim, Minnesota.He works 80 hours a week.He can either grow rutabagas or raise pigs.Every hour that he spends growing rutabagas gives him $2 of income this year.Every hour that he spends raising pigs this year will add $4 to his income next year.In fact, next year's weekly income will be 100 + 4H dollars where H is the number of hours he spends raising pigs this year.Ymir's utility function is U(c1, c2)= min{c1, c2}, where c1 and c2 are his consumption expenditures this year and next year.Ymir doesn't believe in banks and will neither lend money nor borrow money.
a.Draw Ymir's budget line for current and future consumption, labeling key points on it.
b.How many hours a week will he choose to spend raising pigs?
c.How much money will he spend per week on consumption in each year?

Accepted Answer

a.His budget set is bounded by

Question 14

If a consumer views a unit of consumption in period 1 as a perfect substitute (one for one)for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will

Accepted Answer

A) consume only in period 1. 
B) consume only in period 2. 
C) consume equal amounts in each period. 
D) consume more in period 1 than in period 2 if income elasticity exceeds 1, otherwise consume more in period 2 than in period 1. 
E) equalize expenditures but not consumption in the two periods. 
A) consume only in period 1. 
B) consume only in period 2. 
C) consume equal amounts in each period. 
D) consume more in period 1 than in period 2 if income elasticity exceeds 1, otherwise consume more in period 2 than in period 1. 
E) equalize expenditures but not consumption in the two periods.

Question 15

Kenny Kink's utility function is u(c1, c2)=min{c1, c2}, where c1 is his consumption in period 1 and c2 is his consumption in period 2.He earns $200 in period 1 and $220 in period 2.Kenny can borrow and lend at an interest rate of 10%, and there is no inflation.The number of dollars that Kenny spends on consumption in the first period must be

Accepted Answer

A) more than 200 but less than 220. 
B) exactly 200. 
C) more than 220. 
D) exactly 180. 
E) more than 180 but less than 200. 
A) more than 200 but less than 220. 
B) exactly 200. 
C) more than 220. 
D) exactly 180. 
E) more than 180 but less than 200.

Question 16

For every two boxes of strawberries that she consumes, Millicent insists on having one pitcher of cream.She does not, however, insist on consuming the same amount every week.Her utility functions is U =min{s1, 2c1}min{s2, 2c2}, where s1 and s2 are the number of boxes of strawberries she consumes this week and next week and c1 and c2 are the number of pitchers of cream she consumes this week and next.Strawberries cost $2 a box and cream costs $1 a pitcher.She has a present value of $100 to spend on these goods in the next two weeks.The weekly interest rate is 1%.How many boxes of strawberries will she consume this week?

Accepted Answer

A) 10 
B) 20 
C) 22 
D) 14.1 
E) 6.06 
A) 10 
B) 20 
C) 22 
D) 14.1 
E) 6.06

Question 17

If the real interest rate is positive, then a unit of future consumption can be had for the sacrifice of less than 1 unit of current consumption.

Accepted Answer

A) True 
 B)False

Question 18

Minnie has an income of $300 in period 1 and will have an income of $625 in period 2.Her utility function is U(c1, c2)=c0.801c0.202, where c1 is her consumption in period 1 and c2 is her consumption in period 2.The interest rate is 0.25.If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain $300, then her consumption in period 1 would

Accepted Answer

A) double. 
B) increase by $400. 
C) increase by $150. 
D) stay constant. 
E) increase by $120. 
A) double. 
B) increase by $400. 
C) increase by $150. 
D) stay constant. 
E) increase by $120.

Question 19

In an isolated peasant village, the only crop is corn.Good harvests alternate with bad harvests.This year the harvest will be 1,000 bushels.Next year it will be 150 bushels.There is no trade with the outside world.Corn can be stored, but rats will eat 25% of what is stored in a year.The villagers have the Cobb-Douglas utility function U(c1, c2)= c1c2, where c1 is consumption this year and c2 is consumption next year.
a.Draw a budget line for the village with this year's consumption on the horizontal axis and next year's consumption on the vertical axis.On your graph show the quantities at which the budget line intercepts the vertical and horizontal axes.
b.How much will the villagers consume this year?
c.How much will the rats eat?
d.How much will the villagers consume next year?

Accepted Answer

b.600 bush

Question 20

The nominal interest rate is 5% and the inflation rate is 6%.A rational consumer will not choose to save.

Accepted Answer

A) True 
 B)False

Exam 9: Intertemporal Choice-Part A

If the nominal interest rate is 3% and if prices fall by 2% per year, then the real rate of interest is approximately 5%.

Will Wisp will live for exactly two periods.His utility function is U(c1, c2)= c1c2, where c1 is consumption in period 1 and c2 is consumption in period 2.He will have no income in period 2.His income in period 1 is $40,000.If the interest rate rises from 10 to 14%:

If current and future consumption are both normal goods, an increase in the interest rate will necessarily

Patience has a utility function U(c1, c2)= c1/21 + 0.80c1/22, where c1 is her consumption in period 1 and c2 is her consumption in period 2.Her income in period 1 is twice as large as her income in period 2.At what interest rate will she choose to consume the same amount in period 1 as in period 2?

Will Wisp will live for exactly two periods.His utility function is U(c1, c2)= c1c2, where c1 is consumption in period 1 and c2 is consumption in period 2.He will have no income in period 2.His income in period 1 is $80,000.If the interest rate rises from 10 to 12%:

If the real rate of interest is 12% and the nominal rate of interest is 31%, then the rate of inflation must be about

If apples today are perfect substitutes for bananas today, then apples today must also be perfect substitutes for bananas tomorrow.

Mr.O.B.Kandle has a utility function c1c2, where c1 is his consumption in period 1 and c2 is his consumption in period 2.He will have no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,

Harvey Habit has a utility function U(c1, c2)=min{c1, c2}, where c1 and c2 are his consumption in periods 1 and 2 respectively.Harvey earns $189 in period 1 and he will earn $63 in period 2.Harvey can borrow or lend at an interest rate of 10%.There is no inflation.

Harvey Habit has a utility function U(c1, c2)=min{c1, c2}.If he had an income of $880 in period 1 and $1,320 in period 2 and if the interest rate were 0.20, how much would Harvey choose to spend on bread in period 1?

If a consumer views a unit of consumption in period 1 as a perfect substitute (one for one)for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will

If the real interest rate is positive, then a unit of future consumption can be had for the sacrifice of less than 1 unit of current consumption.

The nominal interest rate is 5% and the inflation rate is 6%.A rational consumer will not choose to save.

Budget Constraint-Part A

Budget Constraint-Part B

Preferences-Part A

Preferences-Part B

Utility-Part A

Utility-Part B

Choice-Part A

Choice-Part B

Demand-Part A

Demand-Part B

Revealed Preference-Part A

Revealed Preference-Part B

Slutsky Equation-Part A

Slutsky Equation-Part B

Buying and Selling-Part A

Buying and Selling-Part B

Intertemporal Choice-Part B

Asset Markets-Part A

Asset Markets-Part B

Uncertainty-Part A

Uncertainty-Part B

Risky Assets-Part A

Risky Assets-Part B

Consumers Surplus-Part A

Consumers Surplus-Part B

Market Demand-Part A

Market Demand-Part B

Equilibrium-Part A

Equilibrium-Part B

Auctions-Part A

Auctions-Part B

Technology-Part A

Technology-Part B

Profit Maximization-Part A

Profit Maximization-Part B

Cost Minimization-Part A

Cost Minimization-Part B

Cost Curves-Part A

Cost Curves-Part B

Firm Supply-Part A

Firm Supply-Part B

Industry Supply-Part A

Industry Supply-Part B

Monopoly-Part A

Monopoly-Part B

Monopoly Behavior-Part A

Monopoly Behavior-Part B

Factor Markets-Part A

Factor Markets-Part B

Oligopoly-Part A

Oligopoly-Part B

Game Theory-Part A

Game Theory-Part B

Game Applications-Part A

Game Applications-Part B

Behavioral Economics

Exchange-Part A

Exchange-Part B

Production-Part A

Production-Part B

Welfare-Part A

Welfare-Part B

Externalities-Part A

Externalities-Part B

Information Technology-Part A

Information Technology-Part B

Will Wisp will live for exactly two periods.His utility function is U(c₁, c₂)= c₁c₂, where c₁ is consumption in period 1 and c₂ is consumption in period 2.He will have no income in period 2.His income in period 1 is $40,000.If the interest rate rises from 10 to 14%:

Will Wisp will live for exactly two periods.His utility function is U(c₁, c₂)= c₁c₂, where c₁ is consumption in period 1 and c₂ is consumption in period 2.He will have no income in period 2.His income in period 1 is $80,000.If the interest rate rises from 10 to 12%:

Mr.O.B.Kandle has a utility function c₁c₂, where c₁ is his consumption in period 1 and c₂ is his consumption in period 2.He will have no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,

Harvey Habit has a utility function U(c₁, c₂)=min{c₁, c₂}, where c₁ and c₂ are his consumption in periods 1 and 2 respectively.Harvey earns $189 in period 1 and he will earn $63 in period 2.Harvey can borrow or lend at an interest rate of 10%.There is no inflation.

Harvey Habit has a utility function U(c1, c2)=min{c₁, c₂}.If he had an income of $880 in period 1 and $1,320 in period 2 and if the interest rate were 0.20, how much would Harvey choose to spend on bread in period 1?