Re: DSE 2007

Posted by Gayyam on Jun 20, 2014; 3:58pm
URL: http://discussion-forum.276.s1.nabble.com/DSE-2007-tp7593218p7593221.html

Simplifying the utility function as a Cobb-Douglas function, we have -
U(c1,c2) = c1*(c2)^(1/(1+∂)). The budget constraint is c1 + c2/(1+r) = w1 + w2/(1+r).

Solving, we get c1 = (w1 + w2/(1+r))/(1+(1/(1+∂))).

Now, if c1 increases, the borrowing increases. c1 increases if ∂ increases. Thus the answer is (a).