ECON 305 Study Guide - Midterm Guide: Utility Maximization Problem, Budget Constraint, Fruit Tree

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Midterm 2a with solutions: suppose gilligan is on an island by himself and lives only for two periods. He has a units of fruit fruit tree that can produce in period 2. The fruit rots each period if not consumed and cannot be saved. Answer: gilligan cannot save, so he should consume as much as possible of his endowment each period. He will set: now suppose gilligan is visited by an explorer, jack, who is willing to engage in trade with gilligan. Jack wants to lend to gilligan in period 1 at a gross interest rate r, but wants to be able to borrow from gilligan in period 2. Explain your result with the help of a diagram. Answer: you can easily see that gilligan would want to consume relatively more in. This means he would want to save fruit today and borrow tomorrow.

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