Suppose that Mingsong's utility function for inter-temporal consumption is: U(C0,C1) = ln(C0) +[ ln(C1)/(1+)] where C0 is

Suppose that Mingsong's utility function for inter-temporal consumption is: U(C0,C1) = ln(C0) +[ ln(C1)/(1+ρ)] where C0 is his current period consumption, C1 is his future period consumption and ρ is his subject rate of time preference. Let ρ be 5%. If Mingsong is endowed with $100 this period and $100 in the next period. And suppose the risk-free interest rate is 10%.

What is Mingsong's optimal consumption path (i.e., the optimal level of current and future consumption) if he can only allocate wealth through lending and borrowing?

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To determine Mingsongs optimal consumption path we need to solve the intertemporal utility maximizat... View the full answer