Kenny Kink\'s utility function is u(c1; c2) = minfc1; c2g; where c1 is his consu
ID: 1098913 • Letter: K
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 of dollars that Kenny spends on consumption in the rst period must be: (please show work or explain; i already know the answer, just need to know how to get there)
(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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