In the two-period utility maximization model the opportunity cost of one unit of C1 is
A)one unit of C0.
B)1 + r units of C0.
C)1/(1 + r) units of C0.
D)cannot be determined without more information.

Question

Quizplus · Accepted Answer

The opportunity cost of one unit of C1 is the amount of C0 that needs to be forgone to produce that additional unit of C1. In a two-period model, the cost of consuming one more unit of C1 in period 1 is giving up one unit of C0 that could have been consumed in that period. However, that one unit of C0 could also have been saved and consumed in period 2 with interest earned at the rate of r. Therefore, the opportunity cost of one unit of C1 is 1/(1 + r) units of C0.

In the Two-Period Utility Maximization Model the Opportunity Cost of One