Problem 1. Consider the two-period consumption-savings model we developed in class. As in class, maintain the simplifying assumption that A0=0. Assume that y1 and y2 stand for real income in period 1 and period 2 , respectively, and r for the real interest rate. Suppose that the consumer consumes c1 in period 1 and c2 in period 2 and saves or borrows A1 optimally in period 1. (There is no government here). a. Write down the period-1 and period-2 budget constraints and derive the Lifetime Budget Constraint (LBC). With c2 on the vertical axis and c1 on the horizontal axis, what is the slope of LBC? Why? Plot the LBC. b. Suppose that the household consumes less than its real income in period one. In a single carefully-labeled indifferencecurve/budget constraint diagram show the optimal choice of c1 and c2 that is determined from the interaction of the budget constraint and the indifference map. Highlight the position of endowment point relative to the optimal choice. What is the price of c1 in terms of c2 ? Why? Problem 1. Consider the two-period consumption-savings model we developed in class. As in class, maintain the simplifying assumption that A0=0. Assume that y1 and y2 stand for real income in period 1 and period 2 , respectively, and r for the real interest rate. Suppose that the consumer consumes c1 in period 1 and c2 in period 2 and saves or borrows A1 optimally in period 1. (There is no government here). a. Write down the period-1 and period-2 budget constraints and derive the Lifetime Budget Constraint (LBC). With c2 on the vertical axis and c1 on the horizontal axis, what is the slope of LBC? Why? Plot the LBC. b. Suppose that the household consumes less than its real income in period one. In a single carefully-labeled indifferencecurve/budget constraint diagram show the optimal choice of c1 and c2 that is determined from the interaction of the budget constraint and the indifference map. Highlight the position of endowment point relative to the optimal choice. What is the price of c1 in terms of c2 ? Why