Harvey Habit has a utility function U(c₁, c₂)=min{c₁, c₂}.If he had an income of $1,230 in period 1 and $615 in period 2 and if the interest rate were 0.05, how much would Harvey choose to spend on bread in period 1? A)$1,860 B)$465 C)$1,395 D)$310 E)$930

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Quizplus · Accepted Answer

Harvey's utility function suggests he aims to equalize consumption across two periods. With an income of $1,230 in period 1 and $615 in period 2, and an interest rate of 0.05, he would save or borrow to ensure equal consumption in both periods. The total income over two periods is $1,230 + $615/(1+0.05) = $1,845. Dividing this equally between two periods gives $922.50 per period, which rounds to $930 for period 1 spending.

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

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