Suppose that there are only 10 individuals in the economy each with the following utility function over present and future consumption: U(c1,c2)=c1+2/3c2, where c1 is consumption today, and c2 is consumption tomorrow. Consumption tomorrow is less valued because people are impatient and prefer consuming now rather than later. Buying 1 unit of consumption today costs $1 today and buying 1 unit of consumption tomorrow costs $1 tomorrow. All individuals have income of $10 dollars today and no income tomorrow (because they will be retired) but they can save at the market interest rate r≥0.
E2) Draw the indifference curve. (This is for your understanding. Your drawing will not be graded.)
How much of his or her income will an individual consume today given that the interest rate is 0.3?
a) Less than half of it
b) Exactly half of it
c) The individual is indifferent between consuming today and saving
d)More than half of it
e) All of it
f) None of it