1 Using a similar set up to assignment3. Let's have two agents with utilities as follows

Ua=InCa +4InCa'andUb=InCb+0.25InCb'

Each has the same income in the current and future periods y=200 and y'=250

If they were both to maximize utility in their consumption choices. What will they each choose for C and C' if...

AThey cannot borrow or lendbut can save at r=0% if they want(4 marks)

BThey can borrow or lend from/ to each other at an interest rate they both agree to. What will the interest rate be?Justify your answer. 4 marks

CIs the solution in a or b for type A agents For type b agents2 marks

HintThe lagrangian will generate the followingCa'=4(1+r)Caand Cb'=0.25(1+r)Cb

Note: this question does test your reading comprehension ability