Question

Borrowing Constraint in Two-Period Model - In real life, your credit card credit limit is usually half year or annual income, not your lifetime income. So, consider a twist to the two-period consumption- saving model where household faces borrowing constraint. That is, household cannot borrow more than a pre-specified amount. For simplicity, assume that the household cannot borrow at all; thus, 1 20 The rest of the problem remain identical as max {} log(60) + β1og (c) subject to co +s1=yo c1 = yi + (1 + r) si A) From this point forward, the household is facing the borrowing constraint as specified above that s 2 0. Draw the lifetime budget constraint in the (c1)-space, taking into account this borrowing constraint B) Under what condition that the borrowing constraint s1 2 0 becomes binding? (E.g. how rich is the household today versus tomorrow?)

Answer 1

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