Q 54

Samantha Smoothie's utility function is U(c_{1}, c_{2}) = c_{1}c_{2}, where c_{1} is her consumption in period 1 and c_{2} is her consumption in period 2. She earns $200 in period 1 and $220 in period 2. Samantha can borrow and lend at an interest rate of 10% and there is no inflation. The number of dollars that Samantha spends in the second period must be
A) more than 200 but less than 220.
B) exactly 220.
C) more than 220.
D) exactly 200.
E) less than 200.

Q 55

I am always indifferent between a unit of consumption today and tomorrow and the interest rate is 5%.
A) My intertemporal indifference curve is horizontal.
B) My intertemporal indifference curve is a straight line with slope 21.
C) I will spend all of my current and future income on consumption today.
D) I will spend 5% more on consumption today than on consumption tomorrow.
E) I will spend 5% more on consumption tomorrow than on consumption today.

Q 56

Ophelia says, "If I could lend money at the rates I must pay to borrow, I would. And if I could borrow money at the rates I receive when I lend, I would again. But forsooth, although I spend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational. Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a different interest rate when she borrows than she gets when she lends. Explain what happens in words.