Mortimer lives for two period and has utility function U = C1*C2. He earns no income...
Mortimer lives for two period and has utility function U = C1*C2. He earns no income in period two and his income in period 1 is $80,000. The interest rate at which he can borrow and lend is 10%. Calculate his optimal consumption in each period.
Homework Answers
Mortimer's budget constraint= C1+(1/(1+.1)*C2 =80000
MRS=C2/C1=1/( 1/1.1)= P1/P2
C2=1.1*C1
Put this equation in budget constraint
C1+1.1C1/1.1=80000
2C1= 80000
C1*= $40000
C2=1.1*40000= $44000
Optimal consumption in period 1=$40000
Optimal consumption in period 2= $44000
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