Explain how this individual should respond if interest rate

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Q. An individual has preferences for current and future consumption U (C1, C2) which yield smooth convex indifference curves. Current and future consumption are both normal goods. Human Capital Production Function R = F(H) exhibits diminishing marginal productivity. With an interest rate of 10 percent this person uses $100 current income along with an $80 bank loan to finance $60 of education. Explain how this individual should respond if interest rate increases. Discuss income and substitution effects.

Reference no: EM1369079

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