Suppose we wanted to investigate the saving and borrowing behavior of consumers. It’s not that hard to extend our basic model. We can use the same framework as before but define our two goods as “consumption in period 1” (horizontal axis) and “consumption in period 2” (vertical axis).
a. Construct a budget constraint for a consumer who earns $50 in income in period 1 and $150 of income in period 2. Label this point E for the “Endowment” point. Assume that the individual can choose to save some income in period 1 to be used in period 2, or to borrow some income from period 2 to use in period 1. (Let’s imagine the consumer saves the money by putting it in a piggy bank and can borrow money from parents, who don’t charge interest.)
b. For the consumer in the situation just described, do you think he would consume at their endowment point or would he borrow or save?