Consider the following diagram:
In the diagram,if the optimal policy is chosen then shareholder 2,with the lower indifference curve,will optimise her consumption by:

Question

Consider the following diagram: 
In the diagram,if the optimal policy is chosen then shareholder 2,with the lower indifference curve,will optimise her consumption by:

Quizplus · Accepted Answer

Shareholder 2 has a lower indifference curve, indicating that she values consumption in the second period more than consumption in the first period. In order to optimise her consumption, she should borrow in the first period and repay in the second period, which would allow her to shift consumption from the first period (when it is less valuable to her) to the second period (when it is more valuable to her). Therefore, the best choice for Shareholder 2 is option B - borrowing in the first period and repaying in the second period.

Consider the Following Diagram