Suppose that Molly from Problem 2 had an income of $500 in period 1 and an income of $250 in period 2. Suppose that her utility function were ca1c1-a2, where a = 0.60 and the interest rate were 25%. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would
A) double.
B) increase by $300.
C) increase by $150.
D) stay constant.
E) increase by $500.
Correct Answer:
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