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Microeconomics Issues - Coursework Example

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The paper "Microeconomics Issues" focuses on the tasks on microeconomics carried out by a student as a part of his/her final mark for the course. The utility is defined as the “satisfaction that consumers derive from the consumption of goods and services (commodities)” (Griffiths & Wall, 1944, p.1)…
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Microeconomics Issues
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Download file to see previous pages Let us also assume that at this moment, the most he can spend in period 1 is m1. There may be two possible cases. The consumer could choose to consume at (m1, m2) which means that he just has his income absorbed fully for the period, or he can decide to have less than his income during the first period. In the second case, the consumer is actually saving a part of his first-period consumption for the next period.
Let us now assume that the consumer can borrow or lend money at certain interest rate r. If it is assumed that the consumer first decides to save, he will be consuming less than his income, i.e. m1>c1. So, he now saves (m1-c1). Hence, the amount that he can consume in the second period is given by
c2 = m2 + (m1-c1) + r (m1-c1)
= m2 + (m1-c1) (1+r).
Thus, the amount that the consumer can consume in period 2 is his income and the amount he saved from period 1, plus the interest that he earned on his saving.
Let us now assume that the consumer is having the whole of his income in the first period plus he wants to have more. So, in this case, he will have to borrow some amount as m1<c1. The interest that he will have to give will be the same as r (c1- m1) plus the borrowed amount (c1- m1). So the budget constraint becomes:
c2 = m2 - (c1- m1) - r (c1- m1).
= m2 + (m1-c1) (1+r). ...Download file to see next pagesRead More
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