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2. Dan lives for only two periods. He earns real income mp in the present and my in the future. His utility function is U(Cp.Cf)=6Cp2/3+¹/3. The market real interest rate is (a) Suppose that Dan initially cannot borrow or save. Using a diagram, illustrate and explain the case where Dan would be better off saving. (b) Now suppose that Dan can borrow and save at the market interest rate Determine the equations for consumption in both periods and savings that maximize Dan's utility. (c) Now consider the special case where Dan earns m, in the present and is retired in the future so that m,-0. If the interest rate rises, will his present and future consumption increase, decrease, or stay the same? Will the increase in the interest rate make him save more or less? Illustrate this in a diagram. Explain your answer in reference to the income and substitution effects. (d) Following from (c), suppose instead that Dan is eligible to receive a government pension when he retires. Illustrate and explain what you expect the government pension does to Dan's consumption in both periods and his savings in comparison to no pension.

2. Dan lives for only two periods. He earns real income mp in the present and my in the future. His utility function is U(Cp.Cf)=6Cp2/3+¹/3. The market real interest rate is (a) Suppose that Dan initially cannot borrow or save. Using a diagram, illustrate and explain the case where Dan would be better off saving. (b) Now suppose that Dan can borrow and save at the market interest rate Determine the equations for consumption in both periods and savings that maximize Dan's utility. (c) Now consider the special case where Dan earns m, in the present and is retired in the future so that m,-0. If the interest rate rises, will his present and future consumption increase, decrease, or stay the same? Will the increase in the interest rate make him save more or less? Illustrate this in a diagram. Explain your answer in reference to the income and substitution effects. (d) Following from (c), suppose instead that Dan is eligible to receive a government pension when he retires. Illustrate and explain what you expect the government pension does to Dan's consumption in both periods and his savings in comparison to no pension.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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2. Dan lives for only two periods. He earns real income m, in the present and mf in the future. His utility function is U(Cp,C) =6C,2/Cf. The market real interest rate is r. (a) Suppose that Dan initially cannot borrow or save. Using a diagram, illustrate and explain the case where Dan would be better off saving. (b) Now suppose that Dan can borrow and save at the market interest rate : Determine the equations for consumption in both periods and savings that maximize Dan's utility. (c) Now consider the special case where Dan earns m, in the present and is retired in the future so that mf=0. If the interest rate rises, will his present and future consumption increase, decrease, or stay the same? Will the increase in the interest rate make him save more or less? Illustrate this in a diagram. Explain your answer in reference to the income and substi tution effects. (d) Following from (c), suppose instead that Dan is eligible to receive a government pension when he retires. Illustrate and explain what you expect the government pension does to Dan's consumption in both periods and his savings in comparison to no pension.
Transcribed Image Text:2. Dan lives for only two periods. He earns real income m, in the present and mf in the future. His utility function is U(Cp,C) =6C,2/Cf. The market real interest rate is r. (a) Suppose that Dan initially cannot borrow or save. Using a diagram, illustrate and explain the case where Dan would be better off saving. (b) Now suppose that Dan can borrow and save at the market interest rate : Determine the equations for consumption in both periods and savings that maximize Dan's utility. (c) Now consider the special case where Dan earns m, in the present and is retired in the future so that mf=0. If the interest rate rises, will his present and future consumption increase, decrease, or stay the same? Will the increase in the interest rate make him save more or less? Illustrate this in a diagram. Explain your answer in reference to the income and substi tution effects. (d) Following from (c), suppose instead that Dan is eligible to receive a government pension when he retires. Illustrate and explain what you expect the government pension does to Dan's consumption in both periods and his savings in comparison to no pension.
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