Suppose an individual is offered a choice between two subsidy schemes. Scheme A is composed of $1000 subsidy in the first period and $3600 in the second period. Scheme B is comprised of $3000 subsidy in the first period and $1200 in the second period. The market rate of interest is 20%.

 (a) Is it possible to say, whether individual would prefer A to B or B to A or be indifferent between the two schemes? Compare the individual’s intertemporal allocation of consumption under schemes A and B. Illustrate graphically.

(b) Is it possible to say, whether individual would prefer A to B or B to A or be indifferent between the two schemes if this individual can lend at 15%, but borrow only at interest rate, equal to 20%?

Answer rating: 100% (QA)

Answer First Year Second Year Total Subsidy Scheme A 100000 360000 460000 Sch... View the full answer