In a two-year period, Anna has earnings of $ 6 million this year (year 1) and earnings of $ 10 million next year (year 2). She can borrow or lend at an interest rate of 25 percent. Suppose that Anna decides to borrow $ 1 million in year 1. Show Anna’s optimal consumption point in a diagram. Identify the amount borrowed in year 1, the amount repaid in year 2, consumption in year 1, and consumption in year 2.
Answer to relevant Questions“A higher interest rate lowers the present cost of future consumption.” “A higher interest rate raises the future cost of present consumption.” Use an example to show that both statements are correct. What would an indifference map (with expected return on the vertical axis and risk on the horizontal axis) look like for a risk neutral investor? For a risk-loving investor? Bill and Hillary confront the same market prices for health care and hamburgers. Bill’s optimal consumption point is a corner equilibrium where he consumes only hamburgers; Hillary’s optimal point involves consumption of ...Assume that the marginal product of each input employed by Microsoft depends only on the quantity of that input employed (and not on the quantities of other inputs), and that diminishing marginal returns hold for each input. ...Nineteenth-century British economist Thomas Malthus reasoned that because the amount of land is fixed, as population grows and more labor is applied to land, the productivity of labor in food production would decline, ...
Post your question