Mr O B Kandle Will Live for Only Two Periods

question 39

Multiple Choice

Mr. O. B. Kandle will live for only two periods. In the first period he will earn $100,000. In the second period he will retire and live on his savings. Mr. Kandle has a Cobb-Douglas utility function U(c₁, c₂) = c²₁c₂, where c₁ is his period 1 consumption and c₂ is his period 2 consumption. The real interest rate is r.

• A) If the interest rate rises, Mr. Kandle will save more.
• B) If the interest rises, Mr. Kandle will save less.
• C) He will consume the same amount in each period.
• D) A change in the interest rate won't affect his saving.
• E) None of the above.