Kenny Kink's utility function is u(c₁, c₂) = min{c₁, c₂}, where c₁ is his consumption in period 1 and c₂ is his consumption in period 2. He earns $200 in period 1 and $220 in period 2. Kenny can borrow and lend at an interest rate of 10%, and there is no inflation. The number of dollars that Kenny spends on consumption in the first period must be A) more than 200 but less than 220. B) exactly 200. C) more than 220. D) exactly 180. E) more than 180 but less than 200.

Question

Quizplus · Accepted Answer

Kenny's utility function is u(c₁, c₂) = min{c₁, c₂}, which means that he gets the same utility from consuming $100 in each period as he does from consuming $200 in one period and $0 in the other. Since he earns $200 in period 1 and $220 in period 2, he can borrow $20 in period 1 and repay it with interest in period 2, leaving him with $200 to consume in each period.

Kenny Kink's Utility Function Is U(c1, C2) = Min{c1, C2}

Kenny Kink's Utility Function Is U(c₁, C₂) = Min{c₁, C₂}