Will Wisp Will Live for Exactly Two Periods

Multiple Choice

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%:

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.