Problem 1 Judy lives for two-periods. Her utility from consumption in periods 1 and 2 is given by U(C1,C2)=C1(10-N)/11C2(N+1)/11. She has income m1 and m2 in periods 1 and 2 respectively and no initial wealth. The interest rate is r. There is no inflation.
a)Find Judy’s optimal choice of consumption in period 1 and 2 expressed in present value.
b)What is Judy’s consumption in each period if m1 = £260, m2 = £110 and r = 0.1? Is Judy saving or borrowing?
c)Suppose the interest rate increases to r’ = 0.2. What would be Judy’s consumption in each period? Does she borrow/save more or less than before? Is she now worse off or better off than before
