Consider the problem of an individual that has Y dollars to spend on consuming over two periods. Let c denote the amount of consumption that the individual would like to purchase in period 1 and c2...

Extracted text: Consider the problem of an individual that has Y dollars to spend on consuming over two periods. Let c denote the amount of consumption that the individual would like to purchase in period 1 and c2 denote the amount of consumption that the individual would like to consume in period 2. The individual begins period 1 with Y dollars and can purchase cı units of the consumption good at a price P and can save any unspent wealth. Use sı to denote the amount of savings the individual chooses to hold at the end of period 1. Any wealth that is saved earns interest at rate r so that the amount of wealth the individual has at his/her disposal to purchase consumption goods in period 2 is (1+r)81. This principal and interest on savings is used to finance period 2 consumption. Again, for simplicity, we can assume that it costs P2 dollars to buy a unit of the consumption good in period 2. 2 The individual's total happiness is measured by the sum of period utility across time, u(cı) + u(c2). Let u(c) be an increasing function that is strictly concave in the amount of consumption c enjoyed by the individual. Also assume that the function u(c) satisfies the Inada condition lim→0 u'(c) utility function u(c) with respect to c. = o where u'(c) = au) is the first-derivative of the dc


Extracted text: The individual's total happiness is measured by the sum of period utility across time, u(c1) + u(c2). Let u(c) be an increasing function that is strictly concave in the amount of consumption c enjoyed by the individual. Also assume that the function u(c) satisfies the Inada condition lim→0 u' (c) utility function u(c) with respect to c. = ∞ where u'(c) du(c) is the first-derivative of the dc 1. The individual faces a budget constraint in period 1 of Pcı+s1 = Y and a period 2 budget constraint of P2C2 = (1+r)s1. Interpret each of these two constraints in words.