Your life span is two periods. You are endowed with $500 today.

2. Your life span is two periods. You are endowed with $500 today. You have a production

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technology which can transform an investment of $I today into $40 you can borrow at 331% per annum and lend at 25% per annum.

3

(a) What is the maximum feasible consumption today?

(b) What is the maximum feasible consumption next year?

(c) What is the optimal consumption if U(C0, C1) = min(C0, C1)?

I next year. Also,

(d) What is the “Fisher Separation Theorem?” Is it valid under the assumption of different borrowing and lending rates?