Jack and jill both obey the two period fisher model of...

Jack and Jill both obey the two-period "fisher" model of consumption. Jack earns $100 in both periods, while Jill earns $0 in period 1 but $210 in period 2. Both of them can lend or borrow at an interest rate of r, prices are constant, and they both end period 2 with $0. Assume all income is real terms.

Helena earns $2000 this year and will earn $1500 the next year. The interest rate between each year is 10%. She wants to consume the same quantity each year. She wants to have spent all her money by the end of year 2. Warning: each question does build on each other. How much would she save? How much would she consume? If she wins the lottery during the first year, raising her earnings to $10000 this year, how much would she save, how much would she consume? If she now wants to consume twice as much in year 1 as she does in year 2, how much would she save? How much would she consume? If she now has no preferences about her consumption but she wants to save $5000 in year 1 (to buy a new car in year 2), how much would she consume in year 1 and year 2?

Andrew D.

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