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Question 5 A consumer has an income of 200.000 EUR this year and she expects an income of 110.000 EUR next year. She can borrow and lend money at an interest rate of 10%. Consumption goods cost 1 EUR and there is no inflation. a What is the present value of her endowment? What is the future value of her endowment? b Suppose she has a utility function given by $U = c_1c_2$ where $c_1$ indicates present consumption whereas $c_2$ stands for future consumption. Find out the optimal intertemporal consumption choice. Will she borrow or save in the first period? c Draw her optimal consumption choice indicating clearly whether she is a saver or a borrower. d Assume now that the interest rate increases and becomes 20%. Will the consumer be better or worse off? Redo the graph of point (c) showing the effects of the increase in interest rates.

          Question 5 A consumer has an income of 200.000 EUR this year and she expects an income of 110.000 EUR next
year. She can borrow and lend money at an interest rate of 10%. Consumption goods cost 1 EUR and
there is no inflation.
a What is the present value of her endowment? What is the future value of her endowment?
b Suppose she has a utility function given by $U = c_1c_2$ where $c_1$ indicates present consumption whereas
$c_2$ stands for future consumption. Find out the optimal intertemporal consumption choice. Will she
borrow or save in the first period?
c Draw her optimal consumption choice indicating clearly whether she is a saver or a borrower.
d Assume now that the interest rate increases and becomes 20%. Will the consumer be better or worse
off? Redo the graph of point (c) showing the effects of the increase in interest rates.

Question 5 A consumer has an income of 200.000 EUR this year and she expects an income of 110.000 EUR next
year. She can borrow and lend money at an interest rate of 10%. Consumption goods cost 1 EUR and
there is no inflation.
a What is the present value of her endowment? What is the future value of her endowment?
b Suppose she has a utility function given by U = c1c2 where c1 indicates present consumption whereas
c2 stands for future consumption. Find out the optimal intertemporal consumption choice. Will she
borrow or save in the first period?
c Draw her optimal consumption choice indicating clearly whether she is a saver or a borrower.
d Assume now that the interest rate increases and becomes 20%. Will the consumer be better or worse
off? Redo the graph of point (c) showing the effects of the increase in interest rates.

Added by Michael J.

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