1. Molly earns 96,000 RMB a year from an average-paying job. Due to personal circumstances, she...

 

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1. Molly earns 96,000 RMB a year from an average-paying job. Due to personal circumstances, she anticipates that she will be working less next year, earning only 12,000 RMB. The income that she earns in each period will have to support consumption Co this year and C₁ next year. To simplify, we only consider these two periods. She derives utility from consumption according to the utility function: U(Co, C₁) = CoC₁. Molly is able to borrow money from the bank at an interest rate of 7% per year, while any money that she saves accrues interest at 4% per year. a. Explain why borrowing is not possible in period 1. (30 marks total) (2 marks) b. Hypothetically, what is the largest feasible amount that Molly is able to consume in period 0? Explain what needs to be done to attain this maximum consumption. (4 marks) c. In a clear and fully labelled diagram, draw Molly's intertemporal budget constraint. Clearly label the endowment, axes, the budget constraint, and intercept values. d. Find Molly's utility maximising consumption in each period. (8 marks) (16 marks) 1. Molly earns 96,000 RMB a year from an average-paying job. Due to personal circumstances, she anticipates that she will be working less next year, earning only 12,000 RMB. The income that she earns in each period will have to support consumption Co this year and C₁ next year. To simplify, we only consider these two periods. She derives utility from consumption according to the utility function: U(Co, C₁) = CoC₁. Molly is able to borrow money from the bank at an interest rate of 7% per year, while any money that she saves accrues interest at 4% per year. a. Explain why borrowing is not possible in period 1. (30 marks total) (2 marks) b. Hypothetically, what is the largest feasible amount that Molly is able to consume in period 0? Explain what needs to be done to attain this maximum consumption. (4 marks) c. In a clear and fully labelled diagram, draw Molly's intertemporal budget constraint. Clearly label the endowment, axes, the budget constraint, and intercept values. d. Find Molly's utility maximising consumption in each period. (8 marks) (16 marks)

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Here is my answer to part a and b of the question a Borrowing is not possible for Molly in ... View the full answer