Jane Salud is in Med School. She has financial aid that pays her tuition, but she...

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Jane Salud is in Med School. She has financial aid that pays her tuition, but she has no income to live on. However, banks recognize that she will earn plenty later on, so they are willing to lend her money. Let's simplify her life into two periods. Now she earns no money but in the next period she will be working and she will earn Y dollars. She can borrow money today, in amount B, but she needs to pay it back in the future period. She will have to pay back both the borrowed money and interest on that money, at a rate r. Her consumption today is C₁ B and her consumption next period, C2, is Y minus the amount that she has to pay back. Thinking from the viewpoint of today, her utility for consumption in the two periods is U(C₁) + BU (C₂). The function U exhibits diminishing marginal utility. Note that Jane's marginal utilities are: = MU1 = and MU2 C₁ - В C₂ (a) What is Jane's intertemporal budget constraint for her choices of C₁ and C₂? Write the constraint so that it relates the present value of consumption to the present value of income. (b) Illustrate Jane's optimal choice of C₁ and C₂ on a graph with C2 on the vertical axis. What is the slope of that line? (c) At this optimum, what is the relationship between MU(C₁) and MU(C₂)? (Your answer should be an equation relating the two marginal utilities) Jane Salud is in Med School. She has financial aid that pays her tuition, but she has no income to live on. However, banks recognize that she will earn plenty later on, so they are willing to lend her money. Let's simplify her life into two periods. Now she earns no money but in the next period she will be working and she will earn Y dollars. She can borrow money today, in amount B, but she needs to pay it back in the future period. She will have to pay back both the borrowed money and interest on that money, at a rate r. Her consumption today is C₁ B and her consumption next period, C2, is Y minus the amount that she has to pay back. Thinking from the viewpoint of today, her utility for consumption in the two periods is U(C₁) + BU (C₂). The function U exhibits diminishing marginal utility. Note that Jane's marginal utilities are: = MU1 = and MU2 C₁ - В C₂ (a) What is Jane's intertemporal budget constraint for her choices of C₁ and C₂? Write the constraint so that it relates the present value of consumption to the present value of income. (b) Illustrate Jane's optimal choice of C₁ and C₂ on a graph with C2 on the vertical axis. What is the slope of that line? (c) At this optimum, what is the relationship between MU(C₁) and MU(C₂)? (Your answer should be an equation relating the two marginal utilities)

Answer rating: 100% (QA)

SOLUTION a Janes intertemporal budget constraint can be written as C1 BUC1 Y C2 1 rB where C1 is Janes consumption today C2 is her consumption next period B is the amount she borrows today Y is her in... View the full answer