Exam 9: Intertemporal Choice-Part A

Vanessa's utility function is U(c¹, c²)= c^1/2₁ + 0.83c^1/2₂, where c₁ is her consumption in period 1 and c₂ is her consumption in period 2.In period 2, her income is 4 times as large as her income in period 1.At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)

If the interest rate at which you can borrow is higher than the interest rate at which you can lend, your budget for current and future consumption is a convex set.

If the real rate of interest is 8% and the nominal rate of interest is 28%, then the rate of inflation must be about

In an isolated mountain village, the only crop is corn.Villagers plan for two time periods.In the first time period each villager will harvest 100 bushels.In the second time period, no corn will be harvested.There is no trade with the rest of the world and no stocks of corn remain from before the first period.Corn can be stored from one time period to the next, but rats eat 25% of what is stored.The villagers all have Cobb-Douglas utility functions U(C₁, C₂)=C₁C₂ and can allocate their own corn between consumption and storage as they wish.If the introduction of cats to the village reduces the rats' predations to 10% of what is stored,

In a graph that has current consumption on the horizontal axis and future consumption on the vertical axis, the horizontal intercept of the budget line is the present value of all one's income in the two periods.

Patience has the utility function U(c₁, c₂)=c^1/2₁ +2c^1/2₂ where c₁ is her consumption in period 1 and c₁ is her consumption in period 2.She will earn 100 units of the consumption good in period 1 and 100 units of the consumption good in period 2.She can borrow or lend at an interest rate of 10%. a.Write an equation that describes Patience's budget. b.If Patience neither borrows nor lends, what will be her marginal rate of substitution between current and future consumption? c.If Patience does the optimal amount of borrowing or saving, what will be the ratio of her period 2 consumption to her period 1 consumption?

Peregrine consumes ($700, $880)and earns ($600, $990).If the interest rate is 0.10, the present value of his endowment is

Mandy has an income of $800 in period 1 and will have an income of $500 in period 2.Her utility function is U(c₁, c₂)=c^0.80₁c^0.20₂, where c₁ is her consumption in period 1 and c₂ is her consumption in period 2.The interest rate is .25.If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,000 and her income in period 1 would remain $800, then her consumption in period 1 would

A utility-maximizing consumer would not choose the investment that maximizes the present value of her income stream unless she planned to spend her entire wealth in the first period.

Harvey Habit has a utility function U(c₁, c₂)=min{c₁, c₂}.If he had an income of $1,230 in period 1 and $615 in period 2 and if the interest rate were 0.05, how much would Harvey choose to spend on bread in period 1?

Isaiah is a net borrower when the interest rate is 5% and a net saver when the interest rate is 25%.An increase in the interest rate from 5 to 25% may make Isaiah worse off.

If the interest rate is 5% and will be 5% forever, the present value of an income stream consisting of $10 a year paid to you on February 11 of every year, starting right now, is $210.

Suppose that a person can borrow and lend at an interest rate of 10%.But there is a 5% rate of inflation and the person has to pay an income tax of 30% on all interest income.If the person borrows money, he can deduct interest as an expense.Where current consumption is on the horizontal axis and future consumption is on the vertical axis, the budget line will

The nominal interest rate is 5% and the inflation rate is 6%.A rational consumer

If the inflation rate doubles and the nominal interest rate remains constant, the real interest rate must be halved.

An increase in the interest rate can make a utility-maximizing lender become a borrower.

Holly's utility function is U(c₁, c₂)= c^1/2₁ + 0.87c^1/2₂, where c₁ is her consumption in period 1 and c₂ is her consumption in period 2.In period 2, her income is twice as large as her income in period 1.At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)

I am always indifferent between a unit of consumption today and tomorrow and the interest rate is 5%.

If the price level increases by 80% in one year, then for the real rate of interest to be 10%, the nominal rate of interest would have to be

Mr.O.B.Kandle will live for only two periods.In the first period he will earn $100,000.In the second period he will retire and live on his savings.Mr.Kandle has a Cobb-Douglas utility function U(c₁, c₂)= c²₁c₂, where c₁ is his period 1 consumption and c₂ is his period 2 consumption.The real interest rate is r.