Business, 08.03.2021 19:20, mjohnson05

A recent college graduate lines up a two-year assignment teaching English abroad. During the first year, he will receive a stipend of $50,000. During the second year, there will be no compensation, so he will need to live off his savings from the first year. His preferences over consumption in the first and second years are described by a utility function of the form u(c1,c2)= c1c2

where c1 is consumption in the first year, and c2 is consumption in the second year. The college grad can borrow and/or save at an interest rate of r = 0.1(10%). He makes a budget and determines how much he will consume each year.

As he is finishing his budget, the college grad notices that the interest rate has risen. He recalculates his budget. Will his budgeted first year consumption increase, decrease, or stay the same as in his original budget?

a. First-year consumption will decrease.
b. First-year consumption will stay the same.
c. There is not enough information to determine what will happen to consumption in the first year.
d. First-year consumption will increase.

Answers: 3

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A recent college graduate lines up a two-year assignment teaching English abroad. During the first y...