Define the market opportunity line

Reference no: EM133231726

Assignment:

Consider a consumer who lives for two periods. His utility is a function of his consumption levels in periods 1 and 2 and is given by ??(??1,??1). Her income in periods 1 and 2 are given by ??1and ??2, respectively. The market interest rate is equal to r.

1.1 Give definition of the market opportunity line and explain how existence of the capital market could increase consumer's welfare. Illustrate your answer on a graph.

1.2 Is it possible to have a situation in which access to the capital market does not increase consumer's welfare? Explain and demonstrate your answer on a graph.

1.3 Suppose that consumer's utility function is given by ??(??1 , ??1 ) = 0.2????(??1 ) + 0.8????(??2 ) and that ??1 = 200, ??2 = 110 and r = 0.01. Set up and solve the constrained optimisation problem to find the optimal consumption profile.

Reference no: EM133231726

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