Question: Leonard has the following utility function U(c1,c2)=min{c1+ac2, c2 }, where c1 and c2 are his consumption in periods 1 and 2 , respectively and a

Leonard has the following utility function U(c1,c2)=min{c1+ac2, c2 }, where c1 and c2 are his consumption in periods 1 and 2 , respectively and a is some positive constant. Suppose Leonard has $100 income in period 1 and $105 income in period 2. Prices in both periods are $1. Part A Suppose a=2. If Leonard can freely borrow and lend at 5% interest rate what would be his optimal consumption in both periods? Part B Suppose a =2. Now, Leonard can lend at 5% interest rate, but can't borrow at all. What would be his optimal consumption in both periods? Part C Suppose a=0.5. If Leonard can freely borrow and lend at 5% interest rate what would be his optimal consumption in both periods? Part D Suppose a=0.5. Now, Leonard can lend at 5% interest rate, but can't borrow. What would be his optimal consumption in both periods
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
