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Jane (last time) has preferences over consumption in period 0 and 1 of the form U(c0,...

Jane (last time) has preferences over consumption in period 0 and 1 of the form U(c0, c1) = min{c0, c1}. The price of a unit of consumption in both periods is $1. She has $6,000 in the bank now and is trying to decide between two different investment opportunities, A and B. A: invest $5,000 in period zero and receive $12,000 in period 1. B: invest $1,000 in period zero and receive $3,000 in period 1. (a) If Jane can borrow and lend at the rate of interest of 50%, which investment opportunity will she chose? (b) Given the answer to previous part, how much will she consume in each period? (c) Now suppose Jane can lend at the rate of 50% but has to borrow at the rate i. What borrowing interest would make Jane indifferent between the two investment opportunities?

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Answer #1

c)

In the case of investment B, y0>c0, then the consumer is lending at the rate of 50%. Therefore, to be indifferent between two investments, the condition is UA=UB. Therefore,

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