ECON 305 Study Guide - Midterm Guide: Utility Maximization Problem, Budget Constraint, Utility
20 Apr 2013
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Grading: omid, sepideh, emanuel, bill, edouard, suppose gilligan is on an island by himself and lives only for two periods. He has a fruit tree that can produce units of fruit in period 2. The fruit rots each period if not consumed and cannot be saved. How much should he save in each period? (5 points) Answer: gilligan cannot save, so he should consume as much as possible of his endowment each period. 0 otherwise: now suppose gilligan is visited by an explorer, jack, who is willing to engage in trade with gilligan. Jack wants to lend to gilligan in period 1 at a gross interest rate r, but wants to be able to borrow from gilligan in period 2. Answer: you can easily see that gilligan values consumption relatively more in. This means he would want to borrow today and repay tomorrow. This is what jack is offering, so gilligan should accept the deal.
