1. Look back to the numerical example graphed in Figure 1A.1. Suppose the interest rate in the financial market is 10% and the investment in a friends business returns 20%. What would the ant (A) and grasshopper (G) do if they both start with $100,000? Would they invest in their friends business? Would they borrow or lend? How much and when would each consume?

2. Answer this question by drawing graphs like Figure 1A.1. Casper Milktoast has $200,000 available to support consumption in periods 0 (now) and 1 (next year). He wants to consume exactly the same amount in each period. The interest rate is 8%. There is no risk.

a. How much should he invest, and how much can he consume in each period?

b. Suppose Casper is given an opportunity to invest up to $200,000 at 10% risk-free. The interest rate stays at 8%. What should he do, and how much can he consume in each period?