Assume that the utility function of a consumer is given by
U = ln c1 + ln c2
The interest rate is given by 5% and the endowments are given by (y1, y2) = (100, 120).
(a) Draw the budget constraint.
(b) Calculate the consumption and saving in period 1.
(c) Draw the indifference curve that included the optimal bundle in part (a).
(d) Suppose that interest rate decreased to 4%, draw the Hicksian substitution effect and income
effect on your graph.
(e) Suppose that interest rate decreased to 4%, draw the sky substitution effect and income effect
on your grap