Harvey Habit Has a Utility Function U(c₁, C₂) = Min{c₁

question 12

Multiple Choice

Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}, where c₁ and c₂ are his consumption in periods 1 and 2 respectively. Harvey earns $147 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.

• A) Harvey will save $102.
• B) Harvey will borrow $40.
• C) Harvey will neither borrow nor lend.
• D) Harvey will save $40.
• E) None of the above.

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Definitions:

Expected Return

The average of all possible returns from an investment, weighted by their respective probabilities.

Cyclical Stock

Stocks whose prices are affected by macroeconomic changes in the economy.

Countercyclical Stock

Shares of companies that tend to perform well during economic downturns because they offer goods or services that remain in demand.

Portfolio Weight

The percentage composition of a particular holding or investment relative to the total value of the portfolio.