Question 1. If a consumer is initially a saver, the consumer will remain a saver if the inter

1. If a consumer is initially a saver, the consumer will remain a saver if the interest rate rises.

2. A rise in the value of the endowment causes a decrease in consumption of x1 if x1 is an inferior good.

3. An increase in the minimum wage will cause minimum wage workers to work less.

4. A consumer could exhibit both income effects and substitution effects and still have no change in demand when prices change.

Long Answer

Consider a group of college students who all receive a $1000 money endowment from their parents at the start of both the fall and the spring semesters for entertainment spending. Students get utility from dollars spent on entertainment in the fall semester and in the spring semester, U(c1,c2).

a. What is the budget constraint if a student can save or borrow at a between- semester interest rate of r? (Draw a graph)

b. What is the budget constraint if a student can save at a between-semester interest rate of r but cannot borrow at any interest rate? (Draw a graph)

c. What is the budget constraint if a student can save at a between-semester interest rate of r and can borrow at a between-semester interest rate of R > r? (Draw a graph)

d. Suppose that all the college students have utility functions of the form U(c1,c2) = ln(c1) + b*ln(c2) , where 0 <b ? 1, and face the budget constraint in (a).

Set up and solve the utility maximization problem.

For what values of b will students consume the same amounts in both semesters? Provide an interpretation of why these values of b cause students to consume the same amounts in both semesters.