Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}. If he had an income of $1,230 in period 1 and $615 in period 2 and if the interest rate were 0.05, how much would Harvey choose to spend on bread in period 1? A) $1,860 B) $465 C) $1,395 D) $310 E) $930

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Quizplus · Accepted Answer

Harvey's utility function indicates perfect complements, meaning he will spend equally in both periods. With an interest rate of 0.05, the present value of his income is $1,230 + $615/(1+0.05) = $1,815. To maximize utility, he will spend half of this present value in each period, which is $930 in period 1.

Harvey Habit Has a Utility Function U(c1, C2) = Min{c1

Harvey Habit Has a Utility Function U(c₁, C₂) = Min{c₁