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Suppose the consumer has $100 to spend on consumptionnow (c1) or consumption next year (c2). Any money not spent now can be deposited in a bank account, accumulating interest at an annual rate of 10%, and then withdrawn for spending next year. Therefore, the consumer's budget constraint is c2 = (100-c1) 1.10 .
a. Find the slope of the consumer's budget line when c1 is on the vertical axis and c2 is on the horizontal axis. [Hint: Solve the budget line for c1 and find the coefficient of c2.] Assume the consumer has the multiplicative utility function U(c1,c 2) = c1 c2 .
b. Find the marginal rate of substitution of c2 for c1. [Hint: This is the slope of the consumer's indifference curve when c1 is on the vertical axis c2 is on the horizontal axis.]
c. Compute the quantities of c1 and c2 that this consumer will choose.
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