Ali Inherits $10,000 from His Great-Great Aunt in 2008

question 24

Essay

Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt's will requires that Ali spend the money before December 31, 2009. He can spend the money on two consumption goods: consumption in 2008 or consumption in 2009. This is Ali's only source of money. The interest rate on loans or savings is ten percent.
(a) How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend in 2005 if he only consumes in 2009?
(b) What is the opportunity cost of consuming $1.00 in 2008, in terms of forgone consumption in 2009? Draw Ali's budget constraint and optimal consumption bundle. Please put 2008 consumption on the x-axis.
(c) Ali decides to spend 6000 dollars on consumption in 2008 and 4400 dollars. Show this optimal consumption bundle using a budget constraint and indifference curve diagram.

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