Consider the income and consumption of an individual between two time periods.If consumption in period 2 (C₂)is on the horizontal axis,consumption in period 1 (C₁)is on the vertical axis,and the interest rate is 11 percent,the slope of the budget constraint must be _____. A)0.11 B)0.9 C)1.11 D)11

Question

Quizplus · Accepted Answer

The slope of the budget constraint is the ratio of the change in consumption between the two periods to the change in income, which equals (1 + interest rate). Therefore, the slope of the budget constraint with an 11 percent interest rate is 1.11. Alternatively, we can rearrange the budget constraint equation C₂ = (1 + r)C₁ and solve for C₂, which gives us C₂ = (1 + r)C₁ / (1 + r) = C₁, implying that the budget constraint is a straight line with slope 1. Therefore, the slope of the budget constraint must be 0.9 (i.e., 1/1.11).

Consider the Income and Consumption of an Individual Between Two