Kenny Kink\'s utility function is u(c1; c2) = minfc1; c2g; where c1 is his consu

Question

Kenny Kink's utility function is u(c1; c2) = minfc1; c2g; where c1 is his consumption in pe-

riod 1 and c2 is his consumption in period 2. He earns $200 in period 1 and $220 in period 2.

Kenny can borrow and lend at an interest rate of 10 percent, and there is no in

ation. The number (explain or show work)

of dollars that Kenny spends on consumption in the rst period must be:

(a) more than 200, but less than 220.

(b) exactly 200.

(c) more than 220.

(d) exactly 180.

(e) more than 180, but less than 200.

Explanation / Answer

(b) exactly 200

as by frideman hypothesis,

discounted earning of second period =220/(1+r)

where r=10%

=>discounted earning of second period = 220/1.1

=$200

so there is uniform income in first and second period, hence he spends uniformly of $200

ans:(b) exactly 200

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