A consumer has initial real wealth of 20, current real income of 90, and future income of 110. The real interest rate is 10% per period. Hint: The present value budget constraint becomes: C1+ C2/(1+r) = Y1 + Y2/(1+r) + a, where a is the initial wealth.
Find the maximum amount of C1 and C2 that can be attained with this budget.
Suppose the consumer wants to completely smooth consumption (C1=C2). How much will he save and consume in each period?
What will happen to saving and consumption if current income increase by 11?

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