Meg Has a Utility Function U(C₀,C₁)= C₀^aC₁^{1- a}, Where 0<a<1

question 85

Essay

Meg has a utility function U(C₀,C₁)= C₀^aC₁^{1- a}, where 0<a<1 and C₀ and C₁ are her consumptions in periods 0 and 1 respectively. Suppose her income is M₀ in period 0 and M₁ in period 1.
i)Write down her budget constraint
ii)If a = 0.2, solve for Meg's demand functions for consumption in each period as a function of M₀, M₁ and i.
iii)What happens to C₀ and C₁ if the interest rate increases?

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