An individual lives for two periods, consuming only rice. In period 2 she costlessly produces 1 unit of rice; in period 1 she produces nothing but can borrow rice at interest rate (borrowing in period 1 means repaying in period 2). Consumption is with utility , . Rice is available only from own production and borrowing.
Find the interest rate at which the individual would borrow unit of rice in period 1.
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An individual lives for two periods, consuming only rice. In period 2 she costlessly produces 1 unit of rice; in period 1 she produces nothing but can borrow rice at interest rate r>0 (borrowing z in period 1 means repaying z(1+r) in period 2). Consumption is x₁,x₂≥ 0 with utility U=x₁+β x₂, 0<β<1. Rice is available only from own production and borrowing. Find the interest rate r at which the individual would borrow 1/2 unit of rice in period 1. (A) 2 (B) 1/2 (C) β-1 (D) 1/β-1
Also written as: An individual lives for two periods, consuming only rice. In period 2 she costlessly produces 1 unit of rice; in period 1 she produces nothing but can borrow rice at interest rate r>0 (borrowing z in period 1 means repaying z(1+r) in period 2). Consumption is x_1,x_2>= 0 with utility U=x_1+beta x_2, 0<beta<1. Rice is available only from own production and borrowing. Find the interest rate r at which the individual would borrow 1/2 unit of rice in period 1.
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 2013 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.