Question 1: Draw the budget constraint with Y1 = 100, Y2 = 120, and r = 0.2.
Question 2: Draw the indifference curves for the preference that is represented by the lifetime utility function U = C1 + βC2, where β = 0.5. Do it for various levels of lifetime utility, such as 100,150, and 200.
Question 3: Using the budget constraint and the indifference curves, determine the optimal values of C1 and C2. Does the household have positive consumption in both of the periods or only in one of the two periods? Explain the result.
Question 4: How does the result change when we change the value of β to 1? Explain the result.