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  3. question 3 twoperiod model with a borrowing constraint consider the...

Question: question 3 twoperiod model with a borrowing constraint consider the...

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Question 3: Two-period model with a borrowing constraint Consider the following two-period model with log utility functions: Maro,c log C)+Blog(C2) C2 Y2 1+ r Suppose that this household faces a borrowing constraint in period 1. It cannot borrow in period 1, so it must have C Y 1. Suppose Y1 = 100, ½ 100, r = 0, and β = 0.5. Determine the optimal values of Ci and C2. (Hint: First solve the problem ignoring the borrowing constraint. Then compare C1 and Y, and think about how the borrowing constraint would affect Ci and C2.) 2. Now, suppose that β-1.2, while we still have Yi-100. Y2-100, r-0. Determine the optimal values of C1 and C2. 3. Suppose we do not have the borrowing constraint. In other words, C1 can be larger than Yi. 0.5)? How about How does this affect the solution of the first problem (i.e., the one with the second problem(..e., the one with β-1.2)? Explain the results.

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