Preferences for intertemporal consumption

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Tom has income of $1000 today and $500 tomorrow. Tom can lend and borrow at an interest rate of 10%. There is 5% ináation. His preferences for intertemporal consumption are represented by the following utility function u(c1; c2) = 2c1 + c2.

(a) What is his optimal consumption bundle?

(b) If interest rates increase to 20%, write down his new intertemporal budget constraint and graphically demonstrate the change to his intertemporal budget constraint and label any changes to the intercepts.

Reference no: EM131246757

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