Question: We saw earlier that if utility has the form u x1, * =XiX, 1-a and the budget constraint is of the standard form Pix,+p,x,=m, then

We saw earlier that if utility has the form u x1, * =XiX, 1-a and the budget constraint is of the "standard" form Pix,+p,x,=m, then the am 1-am demand functions for the goods are x, = AX= P1 P2 a) Suppose that Molly's income is m, ? in period land m, in period 2. Write down her budget constraint in terms of present values. b) We want to compare this budget constraint to one of the standard form. In terms of Molly's budget constraint, what is P1 ? What is P2 ? What is m ? c) If a = 0.2, solve for Molly's demand functions for consumption in each period as a function of m, , m, , and r . d) An increase in the interest rate will (Increase/Decrease) her period-1 consumption. It will (Increase/Decrease) her period-2 consumption and (Increase/Decrease) her savings in period 1

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