Suppose that Molly had an income of $200 in period 1 and an income of $460 in period 2.Suppose that her utility function were c^a₁c¹^-^a₂, where a = 0.40 and the interest rate were 15%.If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would A)increase by $80. B)increase by $40. C)double. D)stay constant. E)increase by $200.

Question

Quizplus · Accepted Answer

Given the information, Molly's initial income in period 1 is $200, and it doubles to $400. With a utility function that includes a factor of 0.40 (which could be interpreted as the marginal propensity to consume or a similar concept in this context), and an interest rate of 15%, the increase in consumption in period 1 due to the doubling of income would be directly related to the increase in available income for consumption. However, without the specific utility function's formula, we apply the basic principle that an increase in income leads to an increase in consumption. The choice that best fits an increase in consumption, given the doubling of income and the factors provided, is an increase by $80, which is a proportional response considering the factors given. This choice is made under the assumption that the increase in income allows for additional consumption, taking into account the propensity to consume and the interest rate, without directly calculating the exact change due to the utility function's complexity as presented.

Suppose That Molly Had an Income of $200 in Period