I posted this question before but the answer given conflicted my professor\'s an
ID: 1194139 • Letter: I
Question
I posted this question before but the answer given conflicted my professor's and i could not read the way he formatted the text.
Ernie’s preferences over consumption is defined by the following utility function: (c1,c1) = c13/5c22/5 . Note, c1 is Ernie’s consumption today and c2 is Ernie’s consumption next period. Ernie’s grandmother died and left Ernie her estate, which now Ernie must sell. Ernie receives two offers: 1) $500,000 which will be paid immediately, or , 2) $700,000 which will be paid next period. Ernie currently has no income, however, his bank will let him borrow at an interest rate of 10% (r=0.10). Ernie can also invest money during either time period at an interest rate of 10%.
a. Given Ernie’s preferences, what option should Ernie choose? (show your work)
b. Instead, suppose that Ernie’s preferences are defined by (c1,c2) = min[c1,c2] . What is Ernie’s optimal consumption bundle?
Explanation / Answer
I posted this question before but the answer given conflicted my professor's an