Mr.O.B.Kandle has a utility function c₁c₂, where c₁ is his consumption in period 1 and c₂ is his consumption in period 2.He has no income in period 2.If he had an income of $40,000 in period 1 and the interest rate increased from 10 to 12%, A)his consumption in both periods would increase. B)his savings would increase by 2% and his consumption in period 2 would also increase. C)his consumption in both periods would decrease. D)his savings would not change but his consumption in period 2 would increase by 400. E)his consumption in period 1 would decrease by 12% and his consumption in period 2 would also decrease.

Question

Quizplus · Accepted Answer

Since Mr.O.B.Kandle has a utility function with both period 1 and period 2 consumption, any increase or decrease in interest rates would affect his consumption in both periods. However, since he has no income in period 2, his savings in period 1 would not affect his consumption in period 2.

At a higher interest rate, Mr.O.B.Kandle would be incentivized to save more in period 1 since he can earn a higher return. However, his utility function is not affected by his savings but only by his consumption in both periods. Therefore, his savings would not change but his consumption in period 2 would increase by $400 (=$40,000 x 0.12/2). Thus, the correct answer is D.

MrOBKandle Has a Utility Function C1c2, Where C1 Is

MrOBKandle Has a Utility Function C₁c₂, Where C₁ Is