Ronnie has the utility function (1, 2) = 1 2 1 where (0,1) and 1 and 2 are his consumption in periods 1 and 2, respectively. He earns $200 in period 1 and $280 in period 2. He can borrow or save at an interest rate of 10% and the price of the consumption good is $1 in each period. a. [2] Write Ronnie's present-value and future-value budget constraints. b. [14] If Ronnie does not trust banks and decides to keep his savings in cash (i.e. they earn zero interest) and he does not have access to other sources of credit. i. [10] Solve for his optimal level of consumption in each period. ii. [4] What must be true about the value of for Ronnie to choose to save in the first period? c. [14 ] Ronnie decides to try something new and he gives financial intermediation a chance (i.e. he can now borrow and save at the prevailing interest rate). i. [10] Solve for his optimal level of consumption in each period. ii. [4] Assuming that satisfies the condition that you found in (b)(ii), does Ronnie remain a saver now that he has access to financial intermediation?

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