Question: Nila has the utility function (1, 2 ) = 1 0.5 + 1.12 0.5 where 1 and 2 are her consumption in periods 1 and

Nila has the utility function (1, 2 ) = 1 0.5 + 1.12 0.5 where 1 and 2 are her consumption in periods 1 and 2, respectively. She will earn $100 in period 1 and $110 in period 2. She can borrow or save at an interest rate of 10% and the price of the consumption good is $1 in each period.

a. [2] Draw her budget line on a graph. (Note: Make sure to label everything clearly, including the equation for her budget line and intercepts).

b. [4] Solve for her optimal level of consumption in each period. Is she a saver or borrower? Add an indifference curve that depicts her optimal choice to your diagram from part(b).

c. [2] Is it fair to say that Nila values future consumption more than current consumption? Briefly, explain your reasoning

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