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5. Consider a model in which individuals live for two periods and have utility functions of the form
U=ln(C1)+ln(C2). They earn an income of $100 in the first period and save S to finance
consumption in the second period. The interest rate, r, is 10%. (4 points -2 points each) a) Set up
the individual's lifetime utility maximization problem. Solve for the optimal C1,C2, and S. (Hint:
Rewrite C2 in terms of income, Cl, and r.) Draw a graph showing the opportunity set.

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5 Consider a model in which individuals live for two period.pdf

  • 1. 5. Consider a model in which individuals live for two periods and have utility functions of the form U=ln(C1)+ln(C2). They earn an income of $100 in the first period and save S to finance consumption in the second period. The interest rate, r, is 10%. (4 points -2 points each) a) Set up the individual's lifetime utility maximization problem. Solve for the optimal C1,C2, and S. (Hint: Rewrite C2 in terms of income, Cl, and r.) Draw a graph showing the opportunity set.