Will you be better off or worse off because of the change

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Assignment:

Your parents give you an allowance of 100 pounds for this year and 110 for the next. Credit markets are perfect, and the interest rate is 10%. You are planning your consumption for this year, c₀ to, and for the next year, c₁.

Your utility from a consumption plan (c_o, c₁) is given by U(c₀,c₁) = c₀^θc₁^1-θ.where θ is between zero and one.

Write down the expression of your budget constraint for consumption plans (c₀, c₁) for current and next year.
Compute the MRS between on and c1 as a function of θ.
Compute the optimal consumption plan (c₀,c₁) as a function of 9. For what values of 6 will you be a saver and for what values of a will you borrow?
Assume that θ = 0.5. Suppose that the interest rate has increased. Will you be better off or worse off because of the change? Suppose that the interest rate has decreased. Will you be better off or worse off because of the change? Explain your answer.
Now assume that θ = 0.7. Suppose that the interest rate has increased. Will you be better off or worse off because of the change? Suppose that the interest rate has decreased. Will you be better off or worse off because of the change?

Reference no: EM133334971

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