Ophelia says, "If I could lend money at the rates I must pay to borrow, I would.And if I could borrow money at the rates I receive when I lend, I would again.But forsooth, although I spend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational.Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a different interest rate when she borrows than she gets when she lends.Explain what happens in words.

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The Answer of Ophelia says, "If I could lend money at the rates I must pay to borrow, I would.And if I could borrow money at the rates I receive when I lend, I would again.But forsooth, although I spend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational.Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a different interest rate when she borrows than she gets when she lends.Explain what happens in words.

Ophelia Says, "If I Could Lend Money at the Rates