Asked by
Jason Blakley
on Oct 14, 2024
Verified
Vanessa's utility function is U(c1, c2) c1/21 0.83c1/22, where c1 is her consumption in period 1 and c2 is her consumption in period 2.In period 2, her income is 4 times as large as her income in period 1.At what interest rate will she choose to consume the same amount in period 2 as in period 1? (Choose the closest answer.)
A) 0.10
B) 0
C) 0.30
D) 0.80
E) 0.20
Consumption
Families or individuals partaking in the use of goods and services.
Interest Rate
The percentage of a sum of money charged for its use, often expressed on an annual basis.
Income
The financial benefit achieved regularly through employment or committing capital.
- Ascertain the ways in which interest rates determine consumer behavior in the context of saving and borrowing money.
- Invoke the utility maximization theory to identify the best decisions regarding consumption across different settings.
- Interpret the implications of different utility functions on consumption decisions.
Verified Answer
IB
Learning Objectives
- Ascertain the ways in which interest rates determine consumer behavior in the context of saving and borrowing money.
- Invoke the utility maximization theory to identify the best decisions regarding consumption across different settings.
- Interpret the implications of different utility functions on consumption decisions.