Consider the followingtwo-period problem for the representative consumer.

Y1 = 20

T1 = 10

Y2 = 70

T2= 7

r= 0.05

C1 = consumption in the first period

C2 = consumption in the second period

S= saving in the first period

The representative consumer wants to consume the equal amount in both periods.

The representative consumer faces a limited commitment problem. Because of suchproblem, the bank requires collateral when she borrows money from the bank. The collateral is the value of the houses she has(H), which can be sold in the second period for the price of P. Suppose the following values for H and P

H= 3

P= 7

What is the optimalsaving, S*, that maximizes the representativeconsumer's lifetimeutility?

A.

+25.85

B.

-21

C.

-20

D.

-25.85

E.

None of the above