Question: Ali obeys the two-period Fisherintertemporal model of consumption. Ali

Q: Question: Ali obeys the two-period Fisherintertemporal model of consumption. Ali

a) First period Y1=200 C1=300 Second period Y2=400 C2=280 S= Y1– C1 S = 200–300 C2 = (1+r) S + Y2 280 = – 100 – 100r + 400 100r = 300 – 280 = 20 r = 20/100 = 20% b)In the first period Y1=200 C1=280 In the second period Y2=400 C2=300 S= Y1- C1 S= 200-280=-80 C2= (1+r) S+ Y2 300= (1+r)-80 + 400 300 = -80-80r+400 80r =400-80-300 = 20 r= 20/80=1/4=.25 So the interest rate is 25%

ID: 1239734 • Letter: Q

Question

Question: Ali obeys the two-period Fisherintertemporal model of consumption. Ali earns Rs. 200 in the first periodand Rs. 400 in the second period. A.If Ali consumes Rs. 280 in the first period and Rs. 300 in thesecond period, what is the interestrate? B.Now if Ali's consumption changes in such a way that heconsumes Rs. 300 in the first period andRs.280 in the second period, then calculate the new interestrate? C.Suppose there is an increase in Ali’s income in first period,what will be its impact on his consumption inboth periods and on budget constraint? (Note: Ali’sconsumption in both periods is on normal goods) Question: Ali obeys the two-period Fisherintertemporal model of consumption. Ali earns Rs. 200 in the first periodand Rs. 400 in the second period. A.If Ali consumes Rs. 280 in the first period and Rs. 300 in thesecond period, what is the interestrate? B.Now if Ali's consumption changes in such a way that heconsumes Rs. 300 in the first period andRs.280 in the second period, then calculate the new interestrate? C.Suppose there is an increase in Ali’s income in first period,what will be its impact on his consumption inboth periods and on budget constraint? (Note: Ali’sconsumption in both periods is on normal goods)

Explanation / Answer

First period

Y1=200

C1=300

Second period

Y2=400

C2=280

S= Y1– C1

S = 200–300

C2 = (1+r) S + Y2

280 = – 100 – 100r + 400

100r = 300 – 280

= 20

r = 20/100

= 20%

b)In the first period Y1=200 C1=280

In the second period Y2=400 C2=300

S= Y1- C1

S= 200-280=-80

C2= (1+r) S+ Y2

300= (1+r)-80 + 400

300 = -80-80r+400

80r =400-80-300 = 20

r= 20/80=1/4=.25

So the interest rate is 25%

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Question: Ali obeys the two-period Fisherintertemporal model of consumption. Ali

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