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?

---

Definitions:

Management Accounting Objective

The goal of providing financial and non-financial information to managers to assist in planning, decision-making, and control.

Profit And Loss

A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period of time, typically a fiscal quarter or year, to show the company's financial performance.

Making Decisions

The process of selecting a course of action from several alternatives to achieve a specific objective.

Management Accounting Responses

The actions or strategies that management accounting suggests or implements in response to financial analyses or business challenges.