Illustrate the individual endowment

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Reference no: EM131789237

Question: An individual has current income of $40,000 and future income of $60,000.

a) In an X/Y diagram where you measure current income/consumption along the horizontal axis, illustrate the individual's endowment. This individual has no access to capital markets and is unable to borrow or lend. However, he can store part or all of his current income.

b) In your diagram, illustrate the individual's inter-temporal budget line. Suppose the individual's inter-temporal utility functionis U(C₁; C₂) = √(c₁) + √(c₂).

c) Show that this individual considers current and future consumption imperfect substitutes.

d) Will this individual store any portion of his current income? Suppose now the individual could borrow or lend funds at an interest rate of 50%.

e) In your diagram, add a second inter-temporal budget line to illustrate this case. At this interest rate, will the individual borrow or lend funds? Justify your answer.

Reference no: EM131789237

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