Will Wisp Will Live for Exactly Two Periods

question 24

Multiple Choice

Will Wisp will live for exactly two periods. His utility function is U(c₁, c₂) = c₁c₂, where c₁ is consumption in period 1 and c₂ is consumption in period 2. He will have no income in period 2. His income in period 1 is $80,000. If the interest rate rises from 10 to 12%:

• A) his savings will increase by 2% and his consumption in period 2 will increase.
• B) his savings will not change but his consumption in period 2 will increase by $800.
• C) his consumption in both periods will increase.
• D) his consumption in both periods will decrease.
• E) his consumption in period 1 will decrease by 12% and his consumption in period 2 will increase.

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Definitions:

Automating

The process of using technology to perform tasks without human intervention, often resulting in increased efficiency and reduced error.

Payback Period

The time it takes for an investment to generate cash flows sufficient to recover its initial cost.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts.

Proposed Investment

A planned or suggested allocation of financial resources into a project or asset with an expectation of generating returns in the future.