Suppose that in the first period,a man works,earns income Y,and saves S of the income.In the second (and last)period,the man consumes his savings plus whatever interest it earned (r is the interest rate).What is the price of first-period consumption in this two-period model?

Question

Quizplus · Accepted Answer

The price of first-period consumption in this two-period model is essentially the opportunity cost of consuming one more unit of good in the first period instead of saving it for the second period. This opportunity cost is represented by the interest rate that could have been earned on the savings, hence the correct answer is 1 + r, which reflects the foregone interest plus the principal.

Suppose That in the First Period,a Man Works,earns Income Y,and