Mr. X is endowed with money y0 = $55,000 today and y1 = $88,000 tomorrow. He desires to consume c0 = $80,000 today and c1 = $66,000 tomorrow. 

a. If there is no opportunity to borrow or lend can Mr. X achieve his consumption objective? Explain. 

b. Suppose there is a perfect capital market in which Mr. X may borrow or lend as much as he desires at the market interest rate of 10%. Can Mr. X now achieve his consumption objective? Explain. 

c. Suppose that in addition to a perfect capital market Mr. X has an opportunity to invest I0 = $100,000 today and receive an amount Z tomorrow. Determine the minimum value for Z for which Mr. X will be able to exactly achieve his consumption objective. 

d. Explain exactly what Mr. X must do using the capital market and investment opportunity available to him so that he may exactly achieve his consumption objective.

Answer rating: 100% (QA)

SOLUTION a No Mr X cannot achieve his consumption objective if he cannot borrow or lend He only has ... View the full answer