Present value and future values of income for two periods

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Bob's preferences over consumption is defined by the following utility function: u(c1,c2) = c1^2/3c2^1/3. Note, c1 is Bob's consumption in period 1 and c2 is Bob's consumption in period 2. Bob has an income of $5,000 in period 1 and $6,000 in period 2. Bob can borrow or save at an interest rate of 20% (r=0.20).

a. Calculate Bob's present value and future values of income for the two periods.

b. Suppose that there is no inflation from period 1 to period 2. How much money does Bob spend in period 1?

c. Instead, suppose that inflation occurs from period 1 to period 2 such that all prices double. Because Bob received an A in Econ 4720, he is endowed with superhuman powers and he knew that the inflation would occur when he chose his consumption bundle in period 1. Under this scenario with inflation, how much money does Bob spend in period 1?

Reference no: EM13896986

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