Question 1

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.

Question 2

The intertemporal budget constraint for a consumer can be expressed by setting the present value of her lifetime consumption equal to the future value of her endowment.

Accepted Answer

A) True 
 B)False

Question 3

Patience has the utility function 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?

Accepted Answer

The answer of Patience has the utility function  where...

Question 4

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.

Question 5

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

Accepted Answer

A)  will not save since the real interest rate is negative. 
B)  will save less than 1% of her income. 
C)  will save the same amount regardless of the inflation rate; only the nominal interest rate matters. 
D)  might save despite the negative real interest rate. 
E)  will necessarily save less if the inflation rate rises and the nominal interest rate does not change.

Question 6

Molly has income $400 in period 1 and income $600 in period 2. Her utility function is ca1c1-a2, where a = 0.40 and the interest rate is 0.20. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

Accepted Answer

A)  double. 
B)  increase by $160. 
C)  increase by $80. 
D)  stay constant. 
E)  increase by $400.

Question 7

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 8

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.

Question 9

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?

Accepted Answer

A)  $1,860 
B)  $465 
C)  $1,395 
D)  $310 
E)  $930

Question 10

An increase in the interest rate cannot make a lender who satisfies WARP become a borrower.

Accepted Answer

A) True 
 B)False

Question 11

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) = c0.801c0.202, 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

Accepted Answer

A)  stay constant. 
B)  double. 
C)  increase by $320. 
D)  increase by $400. 
E)  increase by $320

Question 12

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 13

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 $80,000 in period 1 and the interest rate increased from 10 to 19%,

Accepted Answer

A)  his savings would increase by 9% and his consumption in period 2 would also increase. 
B)  his savings would not change but his consumption in period 2 would increase by $3,600. 
C)  his consumption in both periods would increase. 
D)  his consumption in both periods would decrease. 
E)  his consumption in period 1 would decrease by 19% and his consumption in period 2 would also decrease.

Question 14

Molly has income $200 in period 1 and income $920 in period 2. Her utility function is ca1c1-a2, where a = 0.80 and the interest rate is 0.15. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

Accepted Answer

A)  increase by $160. 
B)  double. 
C)  increase by $80 
D)  stay constant. 
E)  increase by $200.

Question 15

Patience has a utility function  , 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

Question 16

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

The answer of Luella has to pay an interest rate...

Question 17

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.

Question 18

Susan is a net borrower when the interest rate is 10% and a net saver when the interest rate is 20%. A decrease in the interest rate from 20% to 10% may make Susan worse off.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A)  If the interest rate rises, Mr. Kandle will save more. 
B)  If the interest rises, Mr. Kandle will save less. 
C)  He will consume the same amount in each period. 
D)  A change in the interest rate won't affect his saving. 
E)  None of the above.

Question 20

If a consumer can borrow and lend at the same interest rate, then he can exactly afford a consumption plan if the present value of his consumption equals the present value of his income.

Accepted Answer

A) True 
 B)False

Exam 9: Intertemporal Choice

The intertemporal budget constraint for a consumer can be expressed by setting the present value of her lifetime consumption equal to the future value of her endowment.

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%:

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

Molly has income $400 in period 1 and income $600 in period 2. Her utility function is c^a₁c¹^-^a₂, where a = 0.40 and the interest rate is 0.20. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

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

Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}, where c₁and 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 $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?

An increase in the interest rate cannot make a lender who satisfies WARP become a borrower.

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.

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 $80,000 in period 1 and the interest rate increased from 10 to 19%,

Molly has income $200 in period 1 and income $920 in period 2. Her utility function is c^a₁c¹^-^a₂, where a = 0.80 and the interest rate is 0.15. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

Patience has a utility function , 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?

Susan is a net borrower when the interest rate is 10% and a net saver when the interest rate is 20%. A decrease in the interest rate from 20% to 10% may make Susan worse off.

If a consumer can borrow and lend at the same interest rate, then he can exactly afford a consumption plan if the present value of his consumption equals the present value of his income.