Consider a representative consumer who lives 2 periods and has the following utility function V =...

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Consider a representative consumer who lives 2 periods and has the following utility function V = √c + B√c where c and c' represent consumption in the current and future periods, respectively. ß is the discount factor where ß = 1/(1 + p) with p > 0 being the rate of time preference. The current-period budget constraint is given by c+ s =y, and the future-period budget constraint is given by c = y + (1+r)s, where y and y' are exogenous income in the current and future periods, respectively, and s is asset savings. What is the relationship between c* and c'* when p > r and why? [Hint: < 1/(1+r) in this case.] c'* is identical to c* because the consumer does not discount the future. c'* is lower than c* because the consumer discounts future consumption more than the opportunity cost of future consumption. c* is higher than c* because the consumer discounts future consumption less than the opportunity cost of future consumption. Consider a representative consumer who lives 2 periods and has the following utility function V = √c + B√c where c and c' represent consumption in the current and future periods, respectively. ß is the discount factor where ß = 1/(1 + p) with p > 0 being the rate of time preference. The current-period budget constraint is given by c+ s =y, and the future-period budget constraint is given by c = y + (1+r)s, where y and y' are exogenous income in the current and future periods, respectively, and s is asset savings. What is the relationship between c* and c'* when p > r and why? [Hint: < 1/(1+r) in this case.] c'* is identical to c* because the consumer does not discount the future. c'* is lower than c* because the consumer discounts future consumption more than the opportunity cost of future consumption. c* is higher than c* because the consumer discounts future consumption less than the opportunity cost of future consumption.

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Here are the steps Since p r we have 11p 11r This means the discount rate on ... View the full answer