Reference no: EM132412259

In the two-period intertemporal consumption model, MRS = (4C2)/C1, r = 2% (written as 0.02), Y1 = 500 and Y2 = 1, 020. Assume that this consumer (let's call her Maya) does not have a borrowing constraint.

a. What is the maximum amount that Maya can consume in the first period? Would your answer be different if Maya had a borrowing constraint? Explain your answers.

b. What is the maximum amount that Maya can consume in the second period? Would your answer be different if Maya had a borrowing constraint? Explain your answers.

c. Use Maya's MRS and budget constraint to compute her optimal consumption combination. Would your answer be different if Maya had a borrowing constraint? Explain your answer.

d. Assume now that Maya's income in the second period increases to Y2 = 1, 122 while her income in the first period remains Y1 = 500 and everything else remains unchanged as well. What is Maya's optimal consumption combination in this case? Would your answer be different if Maya had a borrowing constraint? Explain your answers.

e. Assume again that Maya's income in the second period increases to Y2 = 1, 122 while her income in the first period remains Y1 = 500. In addition, Maya has now the opportunity to choose a transfer S such that: Y1 = 500+S and Y2 = 1, 122-(1+r)S. Assume that Maya's MRS is still (4C2)/C1 and that the interest rate is still 2%. Show that the transfer S does not affect Maya's budget constraint, and therefore her optimal consumption combination. Then find the value of the transfer S that will allow Maya to consume her optimal consumption combination in case she has a borrowing constraint.