Suppose there are two periods (1 is now and 2 is later). Your contemporaneous utility function...

 

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Suppose there are two periods (1 is now and 2 is later). Your contemporaneous utility function is log c and you discount utility in period 2 with discount factor 0 < d < 1. In both periods you have income č. Now there is a bank that is willing to lend or to store money. The bank charges interest at rate r on loans and pays interest at the same rate on deposits. (You had a fight with your mum and she is no longer willing to lend you any money.) Unfortunately, at the beginning of period 1, you damage the neighbor's expensive BMW playing backyard cricket, and you have to pay z dollars for the repair (in period 1). Assume & 0.8, = 20, 000, r = 0.1, and z = 10, 000. How much money will you save or borrow? Suppose there are two periods (1 is now and 2 is later). Your contemporaneous utility function is log c and you discount utility in period 2 with discount factor 0 < d < 1. In both periods you have income č. Now there is a bank that is willing to lend or to store money. The bank charges interest at rate r on loans and pays interest at the same rate on deposits. (You had a fight with your mum and she is no longer willing to lend you any money.) Unfortunately, at the beginning of period 1, you damage the neighbor's expensive BMW playing backyard cricket, and you have to pay z dollars for the repair (in period 1). Assume & 0.8, = 20, 000, r = 0.1, and z = 10, 000. How much money will you save or borrow?

Answer rating: 100% (QA)

To determine whether you should save or borrow money we need to compare the present value of the cos... View the full answer