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 will have no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,A) his savings would not change but his consumption in period 2 would increase by $2,450.B) his consumption in both periods would decrease.C) his consumption in both periods would increase.D) his savings would increase by 7% and his consumption in period 2 would also increase.E) his consumption in period 1 would decrease by 17% 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 will have no income in period 2.If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,A) his savings would not change but his consumption in period 2 would increase by $2,450.B) his consumption in both periods would decrease.C) his consumption in both periods would increase.D) his savings would increase by 7% and his consumption in period 2 would also increase.E) his consumption in period 1 would decrease by 17% and his consumption in period 2 would also decrease.

Jenna Giammanco · Accepted Answer

Final Answer : A, Explanation :  With an increase in the interest rate from 10% to 17%, the return on savings increases. This incentivizes Mr. O.B.Kandle to save more in period 1, leading to a decrease in consumption in period 1. The increased savings then earn a higher interest, leading to more available funds in period 2, thus increasing his consumption in period 2. The specific numbers provided in option A, such as the increase in consumption in period 2 by $2,450, are not directly calculable from the information given, but the general trend of increased savings leading to increased future consumption aligns with economic principles.

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