How much charlie will save as function of the interest rate

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Reference no: EM13186728

Charlie cares only about the amount of chocolate he eats this year (C0) and next year (C1). His preferences correspond to the utility function $U(C_{0},C_{1})=4(\sqrt{C_{0}}+\sqrt{C_{1}})$ Suppose he earns $1,000 this year and nothing next year. Chocolate costs $1 per ounce this year and $4 per ounce next year.

A) Assume the interest rate is 10% (or 0.10). What is Charlie's optimal bundle?

B) Provide a graph of this solution.

C) Now suppose the interest rate (expressed as a decimal) is R. Find a general formula showing how much Charlie will save as a function of the interest rate.

D) When the interest rate rises, does Charlie save more or less? How do you know

Reference no: EM13186728

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