Mr.O.B.Kandle has a utility function c 1 c 2 , where c 1 is his consumption in period 1 and c 2 is his consumption in period 2.He has no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 16%,A) his savings would increase by 6% and his consumption in period 2 would also increase.B) his consumption in both periods would decrease.C) his savings would not change but his consumption in period 2 would increase by 2,100.D) his consumption in both periods would increase.E) his consumption in period 1 would decrease by 16% and his consumption in period 2 would also decrease.

Question

Mr.O.B.Kandle has a utility function c 1 c 2 , where c 1  is his consumption in period 1 and c 2  is his consumption in period 2.He has no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 16%,A) his savings would increase by 6% and his consumption in period 2 would also increase.B) his consumption in both periods would decrease.C) his savings would not change but his consumption in period 2 would increase by 2,100.D) his consumption in both periods would increase.E) his consumption in period 1 would decrease by 16% and his consumption in period 2 would also decrease.

Amanda Kathleen · Accepted Answer

Final Answer : C, Explanation :  The increase in the interest rate makes saving more attractive, so Mr. Kandle will save more in period 1. This will reduce his consumption in period 1, but the higher interest rate will increase the value of his savings in period 2, so his consumption in period 2 will also increase.

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