Your life span is two periods. You are endowed with $500 today. You have a production
technology which can transform an investment of $I today into $40√I next year. Also,
you can borrow at 33 and 1/3% per annum and lend at 25% per annum.
(a) What is the maximum feasible consumption today?
(b) What is the maximum feasible consumption next year?
(c) What is the optimal consumption if U(C0, C1) = min(C0, C1)?
(d) What is the “Fisher Separation Theorem?” Is it valid under the assumption of
different borrowing and lending rates?