Consider a consumer that lives only for two periods. He works in period 1 (and gets income Y1) and moves up the corporate ladder in period 2 (and gets income Y1 < Y2). This consumer has the usual preferences over time: u(C1) + βu(C2) 1. Assume this consumer cannot borrow. What is the consumption in period 1 and period 2? Display graphically. Show the corresponding utility curve.
Consider a consumer that lives only for two periods. He works in period 1 (and gets income Y1) and moves up
the corporate ladder in period 2 (and gets income Y1 < Y2).
This consumer has the usual preferences over time: u(C1) + βu(C2)
1. Assume this consumer cannot borrow. What is the consumption in period 1 and period 2?
Display graphically. Show the corresponding utility curve.
2. Assume that now the consumer is allowed to save or borrow. Write down the new budget constraint.
What is the consumption in period 1 and period 2? Display graphically. Could the consumer be worse
off? Could the consumer be better off? Draw budget constraints such that for one of them consumer
prefers to borrow and for the other - prefers to save.
3. Assume once again that a consumer cannot borrow, but can borrow and immediately sell some
MacGuffins, and in the next period, the consumer must buy back the MacGuffins to return to the
lender. Assume that MacGuffin t r a d e s a t P1 > 0 in the first period and is expected to trade at P ̃2
in the second period. Write down the new budget constraint. Would a consumer borrow a MacGuffin?
What is the condition on the P ̃2? Is P ̃2 a fair price of a MacGuffin? Could the consumer be better off
with a MacGuffin?
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