Question

I need help with 1.2 and 1.4

26 Chapter I. Trade without Money: The Role of Record Keeping 1.2. Suppose a person faces theollowing two bundles: Bundle A, which consists of 6 units consumption good when a person is young and 12 units of the consumption good of the of the consumption good when a person is young and 10 units of the consumption good when a person is old (Cl 4 and c2-: 10), which bundle would this person prefer? when a person is old (c 6 and c 12) and Bundle B, which consists of 4 units Which assumption on preferences did you use to draw this conclusion? 1.3. Consider an economy in which the population follows the rule N,-I.1N-1. In addition, suppose that endowments per young person grow each period according to y, -1.05y,-1. Assume old people do not receive any endowments. Assume that a young person's preferences are such that they want to consume one-half of their endowment so that c0.5y,. Compute the rate at which transfers by young people can be converted into transfers received when old, that is, the conversion rate for this economy 1.4. Consider two economies, labelled A and B. In each one, let every two-period-lived person be endowed with 20 units of the consumption when young and nothing when old. In Economy A, each young person chooses to consume 10 units of the consump- tion good. In Economy B, each young person chooses to consume 8 units of the con- sumption good. In each economy, the young person's choice is the one that maximizes lifetime welfare. a. What, if anything, can you infer about the welfare level of the current and future generations from this information? Specifically, is one on an indifference curve representing greater welfare than the other? " b. What, if anything can you infer about the welfare of the initial old from the descrip- tion given for Economies A and B? 1.5. Suppose a person has constant marginal utility over both goods instead of diminishing marginal utility for consumption when young and consumption when old. a. Draw an indifference curve for constant-marginal-utility preferences. b. If the marginal utility of consumption when young were greater than the marginal utility of consumption when old, how would this affect the equilibrium level of consumption over a person's lifetime? c. What if the marginal utility of consumption when old were greater than the marginal utility of consumption when young?

Thank you

Answer 1

1.2 seems straightforward, A(4,10) vs. B (6,12). Since, in both periods, B represents a higher value of consumption, B is preferred over A. Assumption: More consumption implies more utility, i.e. no negative utility fro higher consumption, or Marginal Utility never becomes negative.

1.4 (a) A(10 Today, 10 Tomorrow) vs B(8 Today, 12 Tomorrow). Here, since consumption in youth is preferred and yields higher Utility, person in economy A is on a higher indifference curve today and person in economy B would be on the higher indifference curve tomorrow. However, if we compare lifetime welfare, person in economy A is on a higher Indifference curve, as it consumes more in his youth.

(b) I am unable to understand what this is asking for, can you please help identify?