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

question 26

Multiple Choice

Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}.If he had an income of $420 in period 1 and $1,050 in period 2 and if the interest rate were 10%, how much would Harvey choose to spend on bread in period 1?

• A)$240
• B)$360
• C)$1,440
• D)$1,080
• E)$720

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Definitions:

Interest Tax Shield

The reduction in income taxes that results from taking allowable deductions for interest expense.

Tax Shield

The reduction in income taxes that results from taking an allowable deduction from taxable income, such as mortgage interest or depreciation.

Coupon Rate

Yearly rate of interest paid on a bond, expressed in terms of percentage of its face value.

Unlevered Firm

A firm that operates without any debt in its capital structure, using only equity for financing.