Suppose Mike is earning (period 1) $100 per week as he is working part time . He

Question

Suppose Mike is earning (period 1) $100 per week as he is working part time . He will earn $154 per week after he graduates and work full-time (period2). He can borrow and lend at 10% interest rate. (y-axis: Consumption per week of period2 (C2); x-axis: Consumption per week of period1 (C1)). a. What is the present value of his future income $154/w b. How much will he have next year if he saves all his current income $100? c. Draw his budget constraint. d. Suppose he consumes exactly his income in each period. Draw his indifference curve describing this situation. e. Now, the interest rate increases to 40%. Draw his new budget constraint. f. Is he going to now increase or decrease C1 at the interest rate 40%? What about his C2? What about his utility level? Provide some intuition.

Explanation / Answer

1.a>.his present value=154/1.1=140

b>.5200$

c/>.

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