Consider Fisher's model for the case in which the consumer can save at rate rs and borrow at

rate rb, where rs < rb.

a. What is the consumer's budget constraint in the case in which he consumes less than his

income in period one? Answer in the form of an equation.

b. What is the consumer's budget constraint in the case in which he consumes more than his

income in period one? Answer in the form of an equation.

c. On a single graph, show the two budget constraints from parts (a) and (b). Shade the area

that represents the combination of first-period and second-period consumption the consumer

can choose.

d. Now add to your graph the consumer's indifference curves. Show three possible outcomes:

one in which the consumer saves, one in which he borrows, and one in which he neither saves

nor borrows.

e. What determines first-period consumption in each of the three cases?