Savitri works for 2 months with wages and , planning consumption to maximize , . She may borrow from her employer in month 1 (repaid from month-2 earnings, interest ) or save first-month wages at the same rate . Savitri will optimally decide to borrow in the first month if and only if:
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Savitri works for 2 months with wages w₁ and w₂, planning consumption c₁,c₂ to maximize log c₁+1/(1+δ)log c₂, δ>0. She may borrow from her employer in month 1 (repaid from month-2 earnings, interest r) or save first-month wages at the same rate r. Savitri will optimally decide to borrow in the first month if and only if: (A) w₂>(1+r)w₁ (B) (1+δ)>(1+r) (C) (1+δ)w₂>(1+r)w₁ (D) (1+δ)<(1+r)
Also written as: Savitri works for 2 months with wages w_1 and w_2, planning consumption c_1,c_2 to maximize log c_1+1/(1+delta)log c_2, delta>0. She may borrow from her employer in month 1 (repaid from month-2 earnings, interest r) or save first-month wages at the same rate r. Savitri will optimally decide to borrow in the first month if and only if:
Budget constraint and consumer equilibrium has come up 99 times in 7 exams since 2004.
This question is on Labour supply and intertemporal choice, part of Budget constraint and consumer equilibrium in Microeconomics.
Treating leisure and future consumption as goods: the labour-leisure choice, saving and borrowing.
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Question from the DSE 2007 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.