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QUESTION
(15 points) Assume the consumers5 preference over current and future consumption is given by .r A If; . U (c, c ) = c2 c 2. Further assume there 1s...
- Solve for the optimal decisions: c, c′ and s. Show your work.
- 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
