Homework Answers
From the utility function we have MRS = MUC1/MUC2
= C2^0.6/0.6C1C2^-0.4
= 5C2/3C1
Budget constraint for two time periods is C1 + C2/(1 + r) = Y1 + Y2/(1 + r)
C1 + C2/(1.08) = 2000 + 1296/(1.08)
C1 + 0.92593C2 = 3200
Now slope of budget constraint = MRS
1/0.92593 = 5C2/3C1
C2 = 0.648C1
Use this in the budget constraint C1 + 0.92593*0.648C1 = 3200
1.6C1 = 3200
C1 = 2000
C2 = 1296
Since C1 = Y1 Amy is neither is a borrower nor a lender.
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