Question: In a two year period Anna has earnings of 6
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.
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