Question

Harvey Habit's utility function is still UCi.c2)-minfcical, where the arguments are the consumption in period 1 and consumption in period 2. The price of bread is period i . The interest rate is 21%. Harvey earns S2000 in period 1 and he will earn S1,100 in period 2 S1 per loaf in a) b) Write Harvey's budget constraint in terms of future value, assuming no inflation How much bread does Harvey consume i does he save? (the answer might not be an integer) period and how much money c) Suppose that Harvey's money income in both-perinods is the same as before, the interest rate is still 21%, but there is a 10% inflation rate. How much would a loaf of bread cost in period 2? Write down Harvey's budget equation for period-1 and period-2 bread, given this new information.

Answer 1

c, G- : 』000 + 1100 1+0 21 C+0.326 : 2000+ 90 9 090 С, + 0326e: 2903.03 9909.0 22 6 C 1s93. 148 2声2000 -t1593 ,148 404. pnind」

LC 1+0-1 Ceoし)れant ǐn.given 0-y 14左 1-44 C, + 1-1 c2 2000 + 1100 1ナ0.21