Question

Janet has life time utility given by ln c1 + 0.7 ln c2. Janet currently consumes the bundle (1000, 600). The level of happiness Janet gets from this bundle is____ utils. If 8 units of c2 is taken away from her, her life time utility will fall roughly by____ utils. At this point, Janet is willing to exchange units of c1 for one unit of c2. If the real interest is 0%, Janet will (save more, less, the same amount.) (Reminder: When c1 increases, you save less.)

Answer 1

So, here if the real interest rate is “0%”, => if we save “$1” then that will remain same in future but according to the utility function the utility from “$1” is more in present period compare to future period, => here the Janet will consume more is current period, => here she will save less.