Two-Period Consumer Model with Different Interest Rates

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This Demonstration shows how the variation of different parameters of the two-period model changes the utility maximizing solution for a consumer deciding what to consume in the first period (
axis) and in the second period (
axis), constrained to a piecewise, two-period budget. The maximizing process is performed with a standard Cobb–Douglas utility function and decides whether the consumer is a saver or a borrower (given by the distance between the blue dashed line and the green dotted line).
Contributed by: Andres F. Rodriguez (April 2013)
Open content licensed under CC BY-NC-SA
Snapshots
Details
Snapshot 1: net borrower
Snapshot 2: net saver
Snapshot 3: neither saver or borrower
The utility function used in this model is Cobb–Douglas: .
The budget constraint is: , with
if the consumer is a saver rather than a borrower.
If the green dotted line is located on a value of greater than the blue dashed line, the consumer saves; otherwise, the consumer borrows.
Permanent Citation