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QUESTION

# [15 points) Assume the consumers' preference over current and future consumption is given by U (c, c) = 4. Further assume there is no government.

- (a) Formulate the consumer problem and solve for the optimal decisions: c, c′ and s. Show your work.
- (b) Looking at the case of a net borrower, what do we have to assume about the substitution and income effects to generate the result that a decrease in r brings about an increase in current-period consumption? Explain your answer.
- (c) Use graphs and finish with concluding sentence to answer the following questions: