Onaonas income in 2018 is $100,000, and in 2019 it will be $120,000. She can borrow from
Question:
Onaona’s income in 2018 is $100,000, and in 2019 it will be $120,000. She can borrow from the local loan shark at an annual interest rate of 50%. She can also save, but the local bank pays only 10% annual interest on savings. If Onaona borrows in 2018, she must repay the principal and interest in 2019; if she saves in 2018, she gets back the principal and interest in 2019.
(a) Graph Onaona’s budget constraint, showing dollars of consumption in 2018 on the horizontal axis and dollars of consumption in 2019 on the vertical axis. Label the intercepts of the budget constraint on the axes and the slopes of its two separate linear portions.
(b) Now suppose Onaona’s situation is reversed, so she can borrow at 10% but savings earn a 50% return. What happens to her budget constraint?
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling