Meg has a utility function U(C₀,C₁)= C₀^aC₁¹^-^a, where 0<a<1 and C₀and C₁are her consumptions in periods 0 and 1 respectively. Suppose her income is M₀in period 0 and M₁in 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 M₀, M₁and i.
iii)What happens to C₀and C₁if the interest rate increases?

Question

Quizplus · Accepted Answer

The Answer of Meg has a utility function U(C₀,C₁)= C₀^aC₁¹^-^a, where 00and C₁are her consumptions in periods 0 and 1 respectively. Suppose her income is M₀in period 0 and M₁in 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 M₀, M₁and i. iii)What happens to C₀and C₁if the interest rate increases?

Meg Has a Utility Function U(C0,C1)= C0aC11- a, Where 0<a<1

Meg Has a Utility Function U(C₀,C₁)= C₀^aC₁¹^-^a, Where 0<a<1