Assignment 3
it the prices ne\t year are l’.‘ : Stw/”titiit and I ’x = 3930/ unit, 806‘ it”‘efi’film‘”ne-
be better or worse off than he was in the previous yea r? (Assume that his tastes a
3)I/igv/Smith lives in a world with two time periods, this period and the next perioo-
1’ each period, which he receives at the beginning of each period, IS $210. l t th‘ 3
5 percent/ period, what is the present value of his lifetime income? Draw
budget constraint. On the same axes, draw Smith’s intertemporal budget
r = 20 percent/ period.
8. Suppose Smith from Problem 7 views current and future consumption as per i
substitutes for one another. Find his optimal consumption bundle in both ca
9. Suppose Smith from Problem 7 views current and future consumptio
complements. Find his optimal consumption bundle in both cases.
10. Karen earns $75,000 in the current period and will earn $75,000 in the future.
a. Assuming that these are the only two periods, and that banks in her
and lend at an interest rate r = 0, draw her intertemporal budget const
b. Now suppose banks offer 10 percent interest on funds deposited d u u‘
period, and offer loans at this same rate. Draw her new intertemporal b
11. Find the present value of $50,000 to be received after 1 year if the rate of inte
a. 8 percent.
b. 10 percent.
3 c. 12 percent.
Q Crusoe will live this period and. the next period as the lone inhabitant of his 6
income is a crop of 100 coconuts that he harvests at the beginning of each
not consumed in the current period spoil at the rate of 10 percent per period,
a. Draw Crusoe’s intertemporal budget constraint. What will be his cons
period if he regards future consumption as a perfect one~for-one substi
consumption?
b. What will he consume each period if he regards 0.8 unit of future cons r
worth 1 unit of current consumption?