Consider the Neoclassical Consumption Model. The representative agent per-period utility

function is U(C), consumption in period 1 and 1 are denoted respectively by C1and C2; the interest rate is R and the subjective discount factor is b. Income in period 1 and period 2 are denoted respectively by Y1and Y2;

B.1 (10 pts) Provide an expression for the intertemporal budget constraint of the representative consumer. What is the price of consumption in period 2 in terms of consumption in period 1? Please explain.

B.2 (10 pts) We have seen that the optimal choice of C1 and C2 is characterized by the Euler equation U'(C1)=b(1+R)U'(C2)

where U'(C) is the marginal utility of consumption. Please provide an economic intuition for the Euler equation.

B.3 (5 pts) Suppose that we specify U(C)=C and we let b=1 and R=0. What do you think would be the solution to the representative consumer problem in this case? Please provide an economic explanation of your answer.