Utility Functions and Optimum Bundles - (two-period model)

e = endowment in period 1

e' = endowment in period 2

y = income in period 1

y' = income in period 2

t = tax in period 1

t' = tax in period 2

Please keep at least 3 decimal places on each step of the calculations. Note that e=y-t, e'=y'-t'

1. Find the optimum bundle of (c,c') for a consumer with endowment of e=8,e'=2 with an interest

rate of 100% and a utility function u(c,c')=ln(c)+ln(c').

2. Find the optimum bundle of (c,c') for a consumer with endowment of e=2, e'=10 with an

interest rate of 100% and a utility function u(c,c')=2ln(c)+0.5ln(c').

3. Which consumer would be worse off from being unable to access credit markets?

4. Which consumer would be more negatively impacted by the credit market imperfections we

discussed in class? Explain why this is the case.