John and Peter are two representative consumers/investors who maximize the utility of consumption. John's utility of consumption is characterized as

ln(x) + 2ln(y)

while Peter puts more weight on the current consumption level and has a utility function of 2ln(x) + ln(y).

John has a wealth of ($10, $20) thousand, while Peter has a wealth of ($20, $15) thousand now and next year, respectively.

(a) What are the optimal consumption plans forJohn and Peter,respectively,if the interest rate is 5% per annum? (b) If John and Peter are the only investors/consumers, what is the equilibrium interest rate?

(c) Further to part (b), how much do they borrow or lend to each other?

Answer rating: 100% (QA)

SOLUTION A JOHN EQUILIBRIUM U xy Inx 2In y MRS MUx1 MUy1 MRS x1 Ux1 1x1 MUy1 Uy1 2 y1 THEREFORE MRS ... View the full answer