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Claire consumes 1 and 2 in period 1 and period 2 respectively, and her intertemporal utility function is ??(??1, ??2 ) = 2??1/2 ??2/2 . Her income in period 1 is ??1 = $1,500 and period 2 is ??2 = $2,000. Assume that the interest rate is 10% for both borrowing and saving.
1. Find the intertemporal budget constraint for Claire.
2. Find the optimal consumption.
3. Assume now that the interest rate for saving is only 5%. Find the new intertemporal budget constraint.
4. Would Claire be better off at the new interest rate in (c)? Discuss
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