Gerald is a CEO in Brainies Consulting, Inc. His income in the first year is m1...
Gerald is a CEO in Brainies Consulting, Inc. His income in the first year is m1 = $200 and in the second m2 = $200. Assume that the interest rate is r = 100%. His time horizon is limited to these two years.
(a) Find PV and FV of Gerald’s income
(b) Show on the graph (C1; C2) Gerald’s budget set. Mark PV, FV, and the slope of his budget line.
(c) Explain what borrowing/lending strategy gives Gerald each of the two “extreme” consumption points. How much does he borrow/lend in the first period, how much does he pay back/receive in the second period?
(d) Suppose his utility function is:
U(C1; C2) = ln(C1) + ln(C2)
Find Gerard’s optimal choice analytically and show it on the graph. Does the optimal consumption involve saving or borrowing?
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