Re: Problems from DSE Papers

Posted by sonudelhi on Jun 20, 2012; 7:57am
URL: http://discussion-forum.276.s1.nabble.com/Problems-from-DSE-Papers-tp2794993p7578294.html

@ chhavi 2007,37

Let y1=w1,y2=w2

if she borrows now then c1>y1,then her consumption in second month is
        c2=y2-(1+r)(c1-y1)
if she saves now then c1<y1,in this case her consumption in second month is
        c2=y2+(1+r)(y1-c1)

whether she borrows or saves, second period consumption is given by
     c2=y2-(1+r)(c1-y1),.....now substitute this value of c2 in utility functiom
max U

dU/dc2=0.......FOC

c1*=y1+[(1+del)y2-(1+r)y1]/(2+del)(1+r)

she will borrow iff (1+del)y2-(1+r)y1>0


so ans is C