Essay
Nick has an income of $2000 this year and he expects an income of $1100 next year. He can borrow and lend money at an interest rate of 10%. Consumption goods cost $1 per unit this year and there is no inflation.
i)What is the present value of Nick's endowment?
ii)What is the future value of his endowment?
iii)Suppose nick has a utility of U(C0,C1)= C0C1. What is Nick's consumption in period 0? what about period 1?
iv)Suppose that the interest rate increases to 20% and that Nick's income in the second year increases to $1200. What is Nick's consumption in period 0? What about period 1?
Correct Answer:
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i)PV = 3000
ii)FV = ...View Answer
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Correct Answer:
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ii)FV = ...
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