Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The horizontal (C1)intercept is
A) $Y _ { 1 } + \frac { Y _ { 2 } } { 1 + r }$
B) $\frac { Y _ { 1 } } { 1 + r } + Y _ { 2 }$
C) $Y _ { 1 } + Y _ { 2 } ( 1 + r )$
D) $Y _ { 1 } ( 1 + r ) + Y _ { 2 }$

Question

Quizplus · Accepted Answer

The horizontal intercept (C1) represents the total resources available in period 1 if all income from period 2 is brought forward to period 1, discounted by the interest rate, $r$. This is given by $Y_1 + \frac{Y_2}{1+r}$, indicating how much can be consumed in period 1 if the consumer decides to borrow against future income, Y2, adjusting for the interest rate.

Draw a Two Period Budget Line Where the Borrow/lending Rate Y1+Y21+rY _ { 1 } + \frac { Y _ { 2 } } { 1 + r }Y1​+1+rY2​​

Draw a Two Period Budget Line Where the Borrow/lending Rate $Y _ { 1 } + \frac { Y _ { 2 } } { 1 + r }$