James has a new job as a research assistant on a rainforest ecology research project in the

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Question:

James has a new job as a research assistant on a rainforest ecology research project in the Amazon. He is going to be paid $64,000 this year, and has been promised a raise to $66,000 next year. He has some assets saved away – totaling $20,000 – and he has a good relationship with his local Vermont bank so is able to earn 5% on any savings, and also borrow money (borrowing against his future income) at 5%. James tends to think about money in $10 increments – so the “price of consumption” is $10.

(a) Plot James’s intertemporal budget line, clearly showing the Y-intercept and X intercept
(b) Draw in an indifference curve representing that James is future-oriented (a saver), ceteris paribus.
(c) Identify what the optimal quantities of consumption are in year 1 and year 2, based on where you drew this indifference curve. These optimal quantities should be numbers (based on real dollar values).
(d) Draw the comparative statics for ONE of the following, showing the change in equilibrium on your graph (you do not need to show new dollar values, just show the changes and resulting equilibrium on the graph). Circle the ONE comparative static you are drawing:
a. James gets a bonus check from the government NOW for 1,000
b. James expects to have a pay cut in year 2 to 50,000
c. The interest rates are cut by the Fed to 0%
d. James expects increased inflation next year by 10%