# Quiz 5: Intertemporal Decision Making and Capital Values

Business

Free

Multiple Choice

D

Q 2Q 2

The key to intertemporal decision making is:
A)the interest rate.
B)central bank actions.
C)commercial banking regulations.
D)individual risk preference.

Free

Multiple Choice

A

Q 3Q 3

In the life cycle model, total amount available for consumption in period 0 is:
A)C

_{0 }= M_{0 }+ present value of(M_{1 }_{ }- C_{1}). B)C_{0 }= M_{0 }+ M_{1.}C)C_{0 }= M_{0 }+ future value of (M_{1}_{ }- C_{1}). D)C_{0 }= M_{0 }+ M_{1 }- C_{1.}Free

Multiple Choice

A

Q 4Q 4

Consumers borrow money from commercial institutions by:
A)demonstrating the present value of their life- cycle income stream.
B)turning legal control of their future activities over to the lender.
C)providing a legally enforceable conditional claim against assets.
D)appealing to the lender's good will.

Free

Multiple Choice

Q 5Q 5

According to Hotelling's Law, the price of a nonrenewable resource changes from one period to the next at the:
A)real growth rate of national production.
B)nominal growth rate of national production.
C)rate of interest.
D)whim of its owner.

Free

Multiple Choice

Q 6Q 6

In Figure 5A, an individual who was compensated for an increase in interest rates would find her intertemporal equilibrium at point:
A)E.
B)A.
C)D.
D)E'.

Free

Multiple Choice

Q 7Q 7

A decrease in interest rate will:
A)rotate the budget line clockwise around the endowment point.
B)parallel shift the budget line up.
C)parallel shift the budget line down.
D)rotate the budget line counter- clockwise around the endowment point.

Free

Multiple Choice

Q 8Q 8

Consumer capital includes goods which are:
A)financed in the long term.
B)passed between generations.
C)consumed with complementary goods.
D)valuable in one time period only.

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Multiple Choice

Q 9Q 9

If the increase income from sale of a nonrenewable resource in the current period is less than the present value of income sale of the resource in the next period, the owner should:
A)wait to see what will happen in the future.
B)sell all of the resource in the next period.
C)sell some of the resource now and some in the next period.
D)sell all of the resource now.

Free

Multiple Choice

Q 10Q 10

The present value of $1000 payable in two years from today is:
A)$1000/(1 + 2r).
B)$1000/(1 + r)

^{2}. C)$1000/(1 - 2r). D)$1000.Free

Multiple Choice

Q 11Q 11

A decrease in income in period 1 will:
A)rotate the budget line clockwise around the endowment point.
B)rotate the budget line counter- clockwise around the endowment point.
C)parallel shift the budget line up.
D)parallel shift the budget line down.

Free

Multiple Choice

Q 12Q 12

Intertemporal choice requires knowledge of:
A)prices and interest rates in all future time periods.
B)the present value of future receipts and expenditures.
C)the consumer's expected lifetime income.
D)prices and interest rates in selected future time periods.

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Multiple Choice

Q 13Q 13

An increase in income in period 0 will:
A)parallel shift the budget line up.
B)rotate the budget line clockwise around the endowment point.
C)parallel shift the budget line down.
D)rotate the budget line counter- clockwise around the endowment point.

Free

Multiple Choice

Q 14Q 14

When the interest rate i rises, C

_{0}: A)decreases because of the income effect. B)increases because of the substitution effect. C)increases because of a total effect. D)decreases because of a total effect.Free

Multiple Choice

Q 15Q 15

If a person's marginal rate of time preference for equal amounts of consumption in the present and next periods is greater than one, she is said to be:
A)elastic.
B)normal.
C)impatient.
D)patient.

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Multiple Choice

Q 16Q 16

Investment in training is called:
A)current consumption.
B)human capital.
C)future consumption.
D)foregone income.

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Multiple Choice

Q 17Q 17

An individual that deposits $1,000 in the bank today and receives $1,368 in three years is earning an annual interest rate of approximately
A)9.2%
B)36.8%
C)12.3%
D)11%

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Multiple Choice

Q 18Q 18

A 25- year- old individual is choosing between three occupations - an entertainer with large earnings when young but those earnings will decline with age; a teacher with constant income over time; and a physician with very low initial earnings but earnings that will continue to rise over time. Other than income the occupations are equally preferable. If the annual earnings of each occupation are added, the total is highest for the career as a physician, second as an entertainer, and lowest as a teacher. Which of the following is true?
A)It makes economic sense to add the annual earnings of an occupation only if the interest rate is positive.
B)Being a doctor is preferable for a low enough interest rate.
C)Being an entertainer is preferable for a low enough interest rate
D)Being a teacher is preferable for a certain value of the interest rate.

Free

Multiple Choice

Q 19Q 19

If a person's marginal rate of time preference for equal amounts of consumption in the present and next periods is less than one, she is said to be:
A)elastic.
B)patient.
C)normal.
D)impatient.

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Multiple Choice

Q 20Q 20

An individual's intertemporal budget for current consumption includes her:
A)current income only.
B)current income and the present value of future income.
C)current income and the future value of future income.
D)present value of future income only.

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Multiple Choice

Q 21Q 21

If C

_{0}_{ }and C_{1 }are both normal goods, for someone who borrows in the initial equilibrium, when i Rises: A)C_{0}_{ }declines. B)C_{0}_{ }increases. C)C_{0 }and C_{1}_{ }both increase. D)C_{1}_{ }increases.Free

Multiple Choice

Q 22Q 22

In equilibrium, the marginal rate of time preference is equal to:
A)1/(1 + i).
B)1/i.
C)1 + i.
D)i.

Free

Multiple Choice

Q 23Q 23

The optimal time to harvest is:
A)when the value of the crop is maximized.
B)when the rate of growth of the crop is maximized.
C)when the present value of the crop is maximized.
D)when the rate of growth of the crop is zero.

Free

Multiple Choice

Q 24Q 24

In the life cycle model, total amount available for consumption in period 1 is:
A)C

_{1 }= M_{1 }+ (1 + i)/(M_{0}_{ }- C_{0}). B)C_{1 }= M_{1 }+ (M_{0 }- C_{0})/(1 + i). C)C_{1 }= M_{1 }+ M_{0}_{ }- C_{0.}_{ }D)C_{1 }= M_{1 }+ (1 + i)(M_{0 }- C_{0}).Free

Multiple Choice

Q 25Q 25

The present value of income to be received in period t is given by:
A)$I

_{t}^{*}(1 + i)^{t}. B)$I_{t}/(1 + i)^{t}. C)$I_{t}. D)$I_{t}/(1 + t)^{i}.Free

Multiple Choice

Q 26Q 26

The rate of interest that people will be willing to pay:
A)is independent of their personal rate of time preference (impatience).
B)will increase as they come to assign more importance to distant events relative to events in the near future.
C)depends primarily upon their present plans for consumption.
D)will be higher the more attractive are the current opportunities they perceive relative to future opportunities.

Free

Multiple Choice

Q 27Q 27

The rate of interest you receive for the use of money is called the:
A)deposit rate.
B)discount rate.
C)borrowing rate.
D)prime rate.

Free

Multiple Choice

Q 28Q 28

If C

_{0}_{ }and C_{1 }are both normal goods, for a person who saves in the initial equilibrium, when i rises: A)C_{0 }and C_{1}_{ }both increase. B)C_{1}_{ }declines. C)C_{1}_{ }increases. D)C_{0 }and C1 both decline.Free

Multiple Choice

Q 29Q 29

In periods 0 and 1, Ralph consumed two goods, x

_{1 }and x_{2}, and his utility functions in the two periods were identical. In period 0 the prices of x_{1}_{ }and x_{2}_{ }were $2 and $1 respectively, and Ralph consumed 10 units of x_{1}_{ }and 80 units of x_{2}. In period 1 the prices of x_{1}_{ }and x_{2}_{ }were identical, and equal to $1. If Ralph consumed 40 units of x_{1}_{ }and 40 units of x_{2}_{ }in period 1, then the Paasche price index is: A)3/2. B)10/9. C)2/3. D)9/10.Free

Multiple Choice

Q 30Q 30

Assets that generate no utility directly:
A)can be expected to grow in value at a rate greater than the rate of interest.
B)should grow in value at a rate equal to the rate of interest.
C)should not be expected to grow in value.
D)can be expected to grow in value at a rate lower than the rate of interest.

Free

Multiple Choice

Q 31Q 31

If someone receives $24 from a pawnbroker for a watch and redeems it one month later for $30, he has:
A)paid about 150% interest at an annual rate to borrow $24 for one month.
B)paid about 25% interest at an annual rate to borrow $24 for one month.
C)borrowed money without paying interest.
D)paid about 300% interest at an annual rate to borrow $24 for one month.
E)paid about 72% interest at an annual rate to borrow $24 for one month.

Free

Multiple Choice

Q 32Q 32

In equilibrium:
A)everyone with a high rate of time preference borrows.
B)everyone with a low rate of time preference borrows.
C)everyone has the same marginal value of current consumption.
D)everyone has the same rate of time preference.

Free

Multiple Choice

Q 33Q 33

The future value two years from today of $1000 received today is:
A)$1000(1 + 2r).
B)$1000(1 - 2r).
C)$1000(1 + r)

^{2}. D)$1000.Free

Multiple Choice

Q 34Q 34

The Separation Theorem:
A)implies that consumers maximize utility over time subject to a wealth constraint.
B)means that individuals choose occupations independent of their consumption streams.
C)requires that the present value of consumption expenditure exceeds the present value of income.
D)means that firms maximize profits as a function of the preferences of consumers.

Free

Multiple Choice

Q 35Q 35

It is conventional to use the present value criterion rather than the future value criterion:
A)although they are equivalent.
B)because it gives smaller results.
C)because it gives better results.
D)because it gives larger results.

Free

Multiple Choice

Q 36Q 36

An increase in interest rate will:
A)parallel shift the budget line down.
B)rotate the budget line clockwise around the intercept with the vertical axis.
C)rotate the budget line clockwise around the endowment point.
D)parallel shift the budget line up.

Free

Multiple Choice

Q 37Q 37

In the movie Wall Street, starring Michael Douglas and Charlie Sheen as stock brokers, the latter learns a valuable lesson about successful investing:
A)Illegal activity is the only way to above- average returns.
B)Mimicking star investors will always yield higher returns.
C)Tracking past stock performance is key to high returns.
D)Labourious analysis of stocks is the key to sound investment.

Free

Multiple Choice

Q 38Q 38

You own two stocks, one whose value depreciated drastically in the last week, and one whose value increased by 80% last week. If you are forced to sell one, which one would you pick?
A)The one that increased in value, to take advantage of the capital gain.
B)You are indifferent because you invest in the market for fun, not income.
C)The past performance is irrelevant for this decision.
D)The one that has fallen in value, to salvage at least a part of its value.

Free

Multiple Choice

Q 39Q 39

In the life cycle model, total amount available for consumption in period 0 is:
A)C

_{0 }= M_{0 }+ M_{1}_{ }- C_{1.}_{ }B)C_{0 }= M_{0 }+ (M_{1 }- C_{1})/(1 + i). C)C_{0 }= M_{0 }+ (1 + i)(M_{1}_{ }- C_{1}). D)C_{0 }= M_{0 }+ (1 + i)/(M_{1 }- C_{1}).Free

Multiple Choice

Q 40Q 40

A perpetuity is:
A)an annuity that lasts for one year.
B)an annuity that lasts for ten years.
C)an annuity that lasts for a long time.
D)an annuity that lasts forever.

Free

Multiple Choice

Q 41Q 41

Brett's reservation price for a 1957 Plymouth Fury in mint condition is $2,500. Which of the following is false?
A)If the price of gasoline were to drop by $.50 per gallon, it is likely that Brett's reservation price would increase.
B)The price Brett pays would include storage costs.
C)If Brett paid $2,500 for such a car, he would be on the same indifference curve as he would have been if he had not bought the car.
D)Brett would buy such a car for $2,000.

Free

Multiple Choice

Q 42Q 42

Dick will receive $5,000 on December 25, 2013, and $15,000 on December 25, 2014. If the yearly rate of interest is 5.0%, then the present value of these payments on December 25, 2012, is:
A)$18,367.
B)$11,666.
C)$6,250.
D)$20,000.

Free

Multiple Choice

Q 43Q 43

Firms which sell consumer capital goods are likely to sell the consumable good:
A)at its reservation price and the capital good at cost.
B)and the consumable good at their reservation prices.
C)and the capital good at cost.
D)at cost and the capital good at its reservation price.

Free

Multiple Choice

Q 44Q 44

The rate of interest you pay to use money is called the:
A)prime rate.
B)borrowing rate.
C)discount rate.
D)deposit rate.

Free

Multiple Choice

Q 45Q 45

If the increase income from sale of a nonrenewable resource in the current period is equal to the present value of income sale of the resource in the next period, the owner should:
A)sell all of the resource in the next period.
B)sell some of the resource now and some in the next period.
C)sell all of the resource now.
D)wait to see what will happen in the future.

Free

Multiple Choice

Q 46Q 46

In periods 0 and 1, Ralph consumed two goods, x

_{1 }and x_{2}, and his utility functions in the two periods were identical. In period 0 the prices of x_{1}_{ }and x_{2}_{ }were $2 and $1 respectively, and Ralph consumed 10 units of x_{1}_{ }and 80 units of x_{2}. In period 1 the prices of x_{1}_{ }and x_{2}_{ }were identical, and equal to $1. If Ralph consumed 40 units of x_{1}_{ }and 40 units of x_{2}_{ }in period 1: A)he was better off in period 0. B)we cannot say whether he was better off in one of the periods. C)he was equally well off in both periods. D)he was better off in period 1.Free

Multiple Choice

Q 47Q 47

When the market for loanable funds is perfect, the borrowing rate is:
A)independent of the deposit rate.
B)less than the deposit rate.
C)greater than the deposit rate.
D)equal to the deposit rate.

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Multiple Choice

Q 48Q 48

It has been documented that an accounting degree offers a higher financial rate of return than an history degree. Why would any student enroll in a history program?
A)For logistics reasons, the accounting programs are capped.
B)Calculating these returns are always subject to error.
C)A utility return makes up the difference.
D)Prospective history students are not good with numbers.

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Multiple Choice

Q 49Q 49

Future values are:
A)the inverse of present values.
B)amounts that can be borrowed today in exchange for future payment.
C)the negative of present values.
D)are the annuity values divided by the number of years.

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Multiple Choice

Q 50Q 50

The present value of $1 payable in the future decreases:
A)the longer time it is to be paid and the lower r is.
B)the longer time it is to be paid and the higher r is.
C)the sooner it is to be paid and the lower r is.
D)the sooner it is to be paid and the higher r is.

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Multiple Choice

Q 51Q 51

Using old capital goods, such as machinery and computers:
A)is not a good idea since firms have to use the newest technology if they are to compete successfully in the market place.
B)may work if accompanied with the necessary skills in terms of labour.
C)is a valid strategy if their prices are low enough for the rate of return to rival the one for newer capital goods.
D)is not an option in today's world given the tremendous value built in the newer machines.

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Multiple Choice

Q 52Q 52

In periods 0 and 1, Ralph consumed two goods, x

_{1 }and x_{2}, and his utility functions in the two periods were identical. In period 0 the prices of x_{1}_{ }and x_{2}_{ }were $2 and $1 respectively, and Ralph consumed 10 units of x_{1}_{ }and 80 units of x_{2}. In period 1 the prices of x_{1}_{ }and x_{2}_{ }were identical, and equal to $1. If Ralph consumed 15 units of x_{1}_{ }and 65 units of x_{2}_{ }in period 1, then: A)he may have been equally well off in both periods. B)we cannot say whether he was better off in one of the periods. C)he was better off in period 1. D)he was better off in period 0.Free

Multiple Choice

Q 53Q 53

Consumer capital goods that last longer typically sell for higher prices because
A)consumers' reservation prices are higher
B)asymmetric information leads consumers to believe they are better
C)they have higher production costs
D)they provide consumers with greater utility

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Multiple Choice

Q 54Q 54

From an individual consumer's point of view, mortgages and bonds are:
A)abstract commodities without practical value.
B)identical.
C)largely speculative.
D)dependent on present value calculations.

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Multiple Choice

Q 55Q 55

In periods 0 and 1, Ralph consumed two goods, x

_{1 }and x_{2}, and his utility functions in the two periods were identical. In period 0 the prices of x_{1}_{ }and x_{2}_{ }were $2 and $1 respectively, and Ralph consumed 10 units of x_{1}_{ }and 80 units of x_{2}. In period 1 the prices of x_{1}_{ }and x_{2}_{ }were identical, and equal to $1. If Ralph consumed 40 units of x_{1 }and 40 units of x_{2 }in period 1, then the Laspeyres price index is: A)10/9. B)2/3. C)3/2. D)9/10.Free

Multiple Choice

Q 56Q 56

Firms that sell both consumer capital goods and the complementary good
A)capture all the consumer surplus of the consumer capital good
B)sell the capital good at marginal cost
C)maximize profit on both goods individually
D)capture all the consumer surplus of the complementary good

Free

Multiple Choice

Q 57Q 57

Phil owns a vacation cottage, and is considering the option of bringing electricity to the cottage. If he does, he can buy electricity for $.10 per kilowatt hour. The Public Utilities Company wants to charge Phil $2,000 for the electrical hook- up, but Phil's reservation price is only $1,500. This question concerns the measurement of the benefit to Phil for the privilege of buying electricity at
$.10 per kilowatt hour. Which of the following is true?
A)EV = $1,500
B)CV = $2,000
C)CS = $2,000
D)CV = $1,500

Free

Multiple Choice

Q 58Q 58

A person who defers consumption to another day is concerned with the:
A)net present value of money.
B)net future value of money.
C)future value of money.
D)present value of money.

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Multiple Choice

Q 59Q 59

Investing in art usually yields less than the market rate of return:
A)because art pieces are inferior goods.
B)because economics cannot explain the functioning of art markets.
C)because art collectors get to enjoy the items while in their possession.
D)because art collectors do not generally care about financially rates of return.

Free

Multiple Choice

Q 60Q 60

A lottery offers the winner a choice between a 20 year annuity of $50,000 starting a year from now and a lump sum of half a million dollars payable today. If the current interest rate is 10%, the winner is better off to take:
A)the annuity, because it has a larger future value.
B)the annuity, because it has a larger present value.
C)the lump sum, because it has a larger future value.
D)the lump sum, because it has a larger present value.

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Multiple Choice

Q 61Q 61

The best time to log a forest is
A)when the trees have reached their maximum value
B)when the growth rate of the trees equals the interest rate
C)when the cost of cutting is minimized
D)when the trees have reached their maximum height

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Multiple Choice

Q 62Q 62

Hotelling's Law applies to which of the following resources?
A)fresh water
B)mineral deposits
C)forests
D)fish

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Multiple Choice

Q 63Q 63

Students that currently have a low level of income:
A)are not able to optimize with respect to intertemporal consumption.
B)cannot consume as a wealthy person.
C)cannot incur large levels of debt.
D)may still be wealthy because they expect higher income in the future.

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Multiple Choice

Q 64Q 64

If the increase income from sale of a nonrenewable resource in the current period is greater than the present value of income sale of the resource in the next period, the owner should:
A)sell all of the resource now.
B)wait to see what will happen in the future.
C)sell all of the resource in the next period.
D)sell some of the resource now and some in the next period.

Free

Multiple Choice

Q 65Q 65

The reservation price for consumer capital good depends on
A)the present value of the EV from the complementary good
B)the marginal utility derived from the capital good
C)the present value of the CV from the capital good
D)consumer preferences and the price of the complementary good

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Multiple Choice

Q 66Q 66

According to the separation theorem, individuals choose consumption expenditures over time by choosing the one with the largest:
A)unconstrained utility.
B)constrained utility.
C)future value.
D)present value.

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Multiple Choice

Q 67Q 67

The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is:
A)$1/(1 + i).
B)$1.
C)0.
D)$i/(1 + i).

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Multiple Choice

Q 68Q 68

Which of the following is an example of consumer capital?
A)education
B)bank account balance
C)refrigerator
D)shares of Procter and Gamble

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Multiple Choice

Q 69Q 69

In periods 0 and 1, Ralph consumed two goods, x

_{1 }and x_{2}, and his utility functions in the two periods were identical. In period 0 the prices of x_{1}_{ }and x_{2}_{ }were $2 and $1 respectively, and Ralph consumed 10 units of x_{1}_{ }and 80 units of x_{2}. In period 1 the prices of x_{1}_{ }and x_{2}_{ }were identical, and equal to $1. If Ralph consumed 15 units of x_{1 }and 65 units of x_{2 }in period 1, then the Paasche quantity index is equal to: A)95/100. B)9/8. C)8/9. D)100/95.Free

Multiple Choice

Q 70Q 70

Which of the following is not an example of intertemporal resource allocation?
A)locating a business in one locality or another
B)getting a job or starting a business
C)buying a car or a corporate stock
D)getting a job today or going to school

Free

Multiple Choice

Q 71Q 71

In Figure 5A, the equilibrium before an interest rate increase is at point:
A)E'.
B)E.
C)D.
D)A.

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Multiple Choice

Q 72Q 72

In Figure 5A, changes in the interest rate cause the intertemporal budget:
A)the intertemporal budget lines pivot around point B.
B)line to shift from the line AE' to DB.
C)line to shift from the line DB to AE'.
D)lines to pivot around point A.

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Multiple Choice

Q 73Q 73

In Figure 5A, the equilibrium after an interest rate increase is at point:
A)D.
B)A.
C)E.
D)E'.

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Multiple Choice

Q 74Q 74

In present value calculations, the assumption of a common interest rate is:
A)convenient.
B)essential.
C)redundant.
D)arbitrary.

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Multiple Choice

Q 75Q 75

The life cycle model hypothesizes that:
A)older people are less risk averse.
B)younger people spend more than they earn.
C)older people spend more than they earn.
D)younger people earn more than they spend.

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Multiple Choice

Q 76Q 76

When making intertemporal resource allocations, substitution of consumption in the next period for consumption in the current period is called:
A)the marginal rate of time preference.
B)the borrowing rate.
C)risk preference.
D)the marginal rate of substitution.

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Multiple Choice

Q 77Q 77

Powerful multinational firms:
A)care more about the numbers of items sold, not about quality products.
B)suppress innovation because consumers are not willing to pay for very high quality goods.
C)would never suppress quality that increases the value of the firm.
D)suppress innovation, especially concerning built- in quality, because it would cannibalize into its own sales.

Free

Multiple Choice

Q 78Q 78

According to the separation theorem, individuals choose among different income streams by choosing the one with the largest:
A)future value.
B)unconstrained utility.
C)constrained utility.
D)present value.

Free

Multiple Choice

Q 79Q 79

A person who borrows money is concerned with the:
A)future value of money.
B)net present value of money.
C)net future value of money.
D)present value of money.

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Multiple Choice

Q 80Q 80

In periods 0 and 1, Ralph consumed two goods, x

_{1 }and x_{2}, and his utility functions in the two periods were identical. In period 0 the prices of x_{1}_{ }and x_{2}_{ }were $2 and $1 respectively, and Ralph consumed 10 units of x_{1}_{ }and 80 units of x_{2}. In period 1 the prices of x_{1}_{ }and x_{2}_{ }were identical, and equal to $1. If Ralph consumed 40 units of x_{1 }and 40 units of x_{2 }in period 1, then the Laspeyres quantity index is: A)9/8. B)6/5. C)8/9. D)5/6.Free

Multiple Choice

Q 81Q 81

According to the separation theorem, individuals choose consumption expenditures by choosing the one that maximizes utility while making the present value of income:
A)not larger than the present value of consumption expenditures.
B)independent of the present value of consumption expenditures.
C)not smaller than the present value of consumption expenditures.
D)equal to the present value of consumption expenditures.

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Multiple Choice

Q 82Q 82

Show that a person will always prefer receiving an extra $1000 this year rather than an extra $1000 next year. (Assume there are no taxes, no inflation and the interest rate is positive and constant.)

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Essay

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True False

Q 84Q 84

True/False. An individual's nearsightedness undermines the validity of the discounted utility model

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True False

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Essay

Q 86Q 86

A household faces a higher interest rate on borrowed funds than on savings. Show that an increase in the interest rate on savings does not affect the amount of money borrowed and that an increase in the interest rate on loans does not affect the amount of savings.

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Essay

Q 87Q 87

True/False. Suppose that the interest rate paid to those saving money increases. As a result, Chris wishes to save less. This suggests that, for Chris' new optimal level of savings, the substitution effect is greater than the income effect.

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True False

Q 88Q 88

Meg has a utility function U(C

_{0},C_{1})= C_{0}^{a}C_{1}^{1}^{-}^{ }^{a}, where 00_{ }and C_{1}_{ }are her consumptions in periods 0 and 1 respectively. Suppose her income is M_{0}_{ }in period 0 and M_{1}_{ }in period 1. i)Write down her budget constraint ii)If a = 0.2, solve for Meg's demand functions for consumption in each period as a function of M_{0}, M_{1}_{ }and i. iii)What happens to C_{0 }and C_{1 }if the interest rate increases?Free

Essay

Q 89Q 89

Decide whether each of the following statements is true or false. Explain your answer using the income and substitution effects.
i)"If both current and future consumption are normal goods, an increase in the interest rate will necessarily make a saver choose more consumption in the second period."
ii)"If both current and future consumption are normal goods, an increase in the interest rate will necessarily make a saver save more."

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Essay

Q 90Q 90

Nick has an income of $2000 this year and he expects an income of $1100 next year. He can borrow and lend money at an interest rate of 10%. Consumption goods cost $1 per unit this year and there is no inflation.
i)What is the present value of Nick's endowment?
ii)What is the future value of his endowment?
iii)Suppose nick has a utility of U(C

_{0},C_{1})= C_{0}C_{1}. What is Nick's consumption in period 0? what about period 1? iv)Suppose that the interest rate increases to 20% and that Nick's income in the second year increases to $1200. What is Nick's consumption in period 0? What about period 1?Free

Essay

Free

Essay

Q 92Q 92

Doug's present and future consumption are perfect substitutes. He does however discount future consumption by a bit. His utility function is
U(C

_{0},C_{1})= C_{0 }+ C_{1}/(1 + a)where a is the discount rate he applies to C_{1}. i)What is the shape of Doug's indifference curves? ii)Show that if i exceeds a then C_{0 }= 0. iii)Show that if i1 = 0.Free

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Q 93Q 93

The local bus company considers purchasing ten more buses. Each bus costs $50,000 and will last seven years. The firm estimates that the purchase will increase it's annual revenues by $100,000 per year for as long as the buses last. If the real interest rate is 10%, should the local bus company buy the buses? Would your answer change if the interest rate fell to 8%?

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Q 94Q 94

Suppose an individual in period one of their life is borrowing. An increase in interest rates causes C0 to fall, but the effect on C1 is ambiguous. Explain why this is true.

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