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

function is(), consumption in period 1 and 2 are denoted respectively by1and2; the interest rate isand the

subjective discount factor is. Income in period 1 and period 2 are denoted respectively by1and2;

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 of1and2is characterized by the Euler equation'(1)= ( 1+) U'(2),

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

B.3 (5 pts)Suppose that we specify() =and we let = 1and =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.