Harvey Habit has a utility function U(c₁, c₂)=min{c₁, c₂}, where c₁ and c₂ are his consumption in periods 1 and 2 respectively.Harvey earns $189 in period 1 and he will earn $63 in period 2.Harvey can borrow or lend at an interest rate of 10%.There is no inflation. A)Harvey will save $60. B)Harvey will borrow $60. C)Harvey will neither borrow nor lend. D)Harvey will save $124. E)None of the above.

Question

Quizplus · Accepted Answer

Harvey will save $60 because he wants to equalize his consumption in both periods, and with the interest rate, saving $60 in period 1 will allow him to have equal consumption in both periods.

Harvey Habit Has a Utility Function U(c1, C2)=min{c1, C2}, Where

Harvey Habit Has a Utility Function U(c₁, C₂)=min{c₁, C₂}, Where