Nelly's preferences among the consumption this year, and the consumption next year, are given by the utility function. She is endowed with income of $11,000 in period 1 and $4,000 in period 0.
1. Discuss how much will she consume in period 0 and in period 1, if she can borrow and lend at an interest rate of 10 percent.
2. Assume she can lend at the interest rate of 8 percent, but due to a bad credit history Nelly can only borrow from a loan shark, who charges her an interest rate of 40 percent. Discuss how much will she consume in each period?