Rocky has a utility function that can be written as is U(c1,c2)= max {c1,ßc2}. W

Question

Rocky has a utility function that can be written as is U(c1,c2)= max {c1,ßc2}. Where c1 and c2 are his consumption in periods 1 and 2, respectively, and ß is a discount rate with value 0.9, meaning that consumption in period 2 is not valued as much as consumption in period 1. Harvey earns $180 in period 1, and he will earn $77 in period 2. He can borrow and save at an interest rate of 10%. There is no inflation. Which of the following is true? g) Harvey will save $180 h) Harvey will save $70 i) Harvey will borrow $70 j) Harvey will neither borrow nor lend k) None of the above.

Explanation / Answer

Answer :- Option h). Harvey will save $ 70.

Explanation :- Amount saved by Harvey = 77 / (1 + 0.10)

= 77 / 1.10

= $ 70.

Conclusion :- Harvey will save $ 70. (Option h).

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.