2 Constraint on borrowing Agents' utility is given by U(C1, C2) = InC1 + InCz Here we assume discount rate =1. Budget constraints are given by C1 + B = Y1 C2 = Y2 + B for period 1 and 2 respectively. So, we assume interest rate is zero (r=0).1. Derive the present value budget constraint. 2. Solve the utility maximization problem and derive the optimal level of consumption for each period, Cl and C2. 3. Suppose agents can not borrow. Namely, B 2 0. What is the optimal level of consumption for each period Cl and C2. To answer this, consider the following two cases for the optimal level of consumption . Y1 2 Y2 . Y1