Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}, where c₁and c₂ are his consumption in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation. A) Harvey will save $60. B) Harvey will borrow $60. C) Harvey will neither borrow nor lend. D) Harvey will save $124. E) None of the above.

Question

Quizplus · Accepted Answer

Harvey's utility function indicates he wants equal consumption in both periods. With an interest rate of 10%, he can save $60 from period 1 to have equal consumption of $126 in both periods.

Harvey Habit Has a Utility Function U(c1, C2) = Min{c1

Harvey Habit Has a Utility Function U(c₁, C₂) = Min{c₁