Consider an economy that is composed of identical individuals who live for two periods. These individuals have preferences over consumption in periods 1 and 2 given by: U = \T1 + vT2 They receive an income of Y1 = 40 in period 1 and an income of Y2 = 25 in period 2. They can save as much of their income as they like in bank accounts, earning an interest rate of 10% per period. They do not care about their children, so they spend all their money before the end of period 2. Each individual's lifetime budget constraint is given by C1 + C2/(1 + r) = Y1 + Y2/(1 + r). Individuals choose consumption in each period by maximizing lifetime utility subject to this lifetime budget constraint.

Consider an economy that is composed of identical individuals who live for two periods. These individuals have preferences over consumption in periods 1 and 2 given by: U = \T1 + vT2 They receive an income of Y1 = 40 in period 1 and an income of Y2 = 25 in period 2. They can save as much of their income as they like in bank accounts, earning an interest rate of 10% per period. They do not care about their children, so they spend all their money before the end of period 2. Each individual's lifetime budget constraint is given by C1 + C2/(1 + r) = Y1 + Y2/(1 + r). Individuals choose consumption in each period by maximizing lifetime utility subject to this lifetime budget constraint.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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