Ophelia has income of M₁ = 100 in period 1 and M₂ = 20 in period 2. If she chooses to, she can either save or borrow at an interest rate of i = 0.05 (so an interest rate of 5% per period). The rate of price inflation between periods is π = 0 (so a 0% inflation rate) and price of a unit of consumption in each period is normalized to 1 (so p₁ = P2 = 1). Suppose that Ophelia's utility function over intertemporal consumption bundles is U (C₁, C₂) = ln c₁ + In c₂. (Notice that this utility function implies that: (i) Ophelia has diminishing marginal utility of consumption in each period and (ii) Ophelia does not discount the future at all relative to the present.) Which of the following statements accurately describes Ophelia's saving/borrowing decision in the first period? It cannot be determined whether Ophelia saves or borrows in the first period. Ophelia borrows in the first period. Ophelia neither saves nor borrows in the first period. O Ophelia saves in the first period.

Ophelia has income of M₁ = 100 in period 1 and M₂ = 20 in period 2. If she chooses to, she can either save or borrow at an interest rate of i = 0.05 (so an interest rate of 5% per period). The rate of price inflation between periods is π = 0 (so a 0% inflation rate) and price of a unit of consumption in each period is normalized to 1 (so p₁ = P2 = 1). Suppose that Ophelia's utility function over intertemporal consumption bundles is U (C₁, C₂) = ln c₁ + In c₂. (Notice that this utility function implies that: (i) Ophelia has diminishing marginal utility of consumption in each period and (ii) Ophelia does not discount the future at all relative to the present.) Which of the following statements accurately describes Ophelia's saving/borrowing decision in the first period? It cannot be determined whether Ophelia saves or borrows in the first period. Ophelia borrows in the first period. Ophelia neither saves nor borrows in the first period. O Ophelia saves in the first period.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter2: The One Lesson Of Business

Section: Chapter Questions

Problem 2.6IP

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