Suppose that Meghan earns $2,000 this month, and $2,200 nextmonth
with a utility function over consumption in these two periodsgiven
by U(C1, C2) = C1C2, where MUC1 = C2 and MUC2 = C1. Supposethat
the deposit interest rate is rL = 1%, while the creditinterest
rate is rB = 2% + x%, where x is 4.
a) Draw a graph with Meghan’s budget constraint for consumption inthis month
vs. next month.
b) Will Meghan borrow or save, or neither?
c) How will your answer change if the interest rates rL and rB bothincrease by 5
percentage points?
