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2 3/2 Consider a two-period economy populated by two different individuals. Individual A's lifetime utility is 2012 + 2c1/2 while that of individual B is 2 +? 3/2 3% 3 Individuals can save or borrow by buying or selling a riskless discount bond in period 0 which pays one unit of consumption in period Bonds trade at price qo in period 0. Aggregate income is 10 in period 0 and 15 in period 1. It is unequally divided; Individual A earns all the income in period 0 while individual B earns all the income in period 1. a) Which of the two individual has a stronger desire to smooth consumption over time? Explain. b) Which of the two individual has a stronger preference for period O's consumption? Explain. c) Write down individual A's problem and characterize his optimal saving/borrowing decisions by comparing the cost and benefits of trading bonds (i.e. find af for A). d) Write down individual B's problem and characterize her optimal saving/borrowing decisions by comparing the cost and benefits of trading bonds (i.e. find a for B). e) Why is the bonds market not equilibrium when qo = 0.25. What must happen to reach an equilibrium? Explain. 2 3/2 Consider a two-period economy populated by two different individuals. Individual A's lifetime utility is 2012 + 2c1/2 while that of individual B is 2 +? 3/2 3% 3 Individuals can save or borrow by buying or selling a riskless discount bond in period 0 which pays one unit of consumption in period Bonds trade at price qo in period 0. Aggregate income is 10 in period 0 and 15 in period 1. It is unequally divided; Individual A earns all the income in period 0 while individual B earns all the income in period 1. a) Which of the two individual has a stronger desire to smooth consumption over time? Explain. b) Which of the two individual has a stronger preference for period O's consumption? Explain. c) Write down individual A's problem and characterize his optimal saving/borrowing decisions by comparing the cost and benefits of trading bonds (i.e. find af for A). d) Write down individual B's problem and characterize her optimal saving/borrowing decisions by comparing the cost and benefits of trading bonds (i.e. find a for B). e) Why is the bonds market not equilibrium when qo = 0.25. What must happen to reach an equilibrium? Explain

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