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Question 1 of 2

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You must read each slide, and complete any questions on the slide, in sequence.

Construct a budget constraint for a consumer who earns $100 in income in Period 1 and $300 of income in Period 2. Label this point E, for the “endowment” point. Assume that the consumer can choose to save some income in Period 1 to be used in Period 2, or to borrow some income from Period 2 to use in Period 1. (Let’s imagine the consumer saves the money by putting it in a piggy bank and can borrow money from his parents, who don’t charge interest.)

For the consumer in the situation just described, he would .

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Correct! Assuming that the consumer wants to smooth consumption over time and that he can borrow freely, we would expect this consumer to borrow money from his parents. If he wanted the same amount of consumption in each period, we would expect him to borrow $100.
Sorry! Consider what this consumer might do if he wanted to smooth consumption over the two periods. To review the budget constraint, please see the section “The Budget Constraint.”
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