Open Word and answer the following questions. Save the document and print it when you are done. 1. Solve the problem in the OptimalChoice sheet using analytical methods. In other words, find the...

Open Word and answer the following questions. Save the document and print it when you are done.

1. Solve the problem in the OptimalChoice sheet using analytical methods. In other words, find the reduced-form expressions for
,, and savings∗ from

Show your work.

2. Use the parameter values in the sheet (with r = 20%) to evaluate your answers for question 1. Provide numerical answers for the optimal combination of consumption in time periods 1 and 2 and for optimal savings.

3. Do your answers from question 2 agree with Excel’s Solver results? Is this surprising? Explain.

4. Use your reduced-form solution from question 1 to compute the interest rate elasticity of savings as r = 20%. 5. In working through this chapter, you found the interest rate elasticity of savings from r = 20% to 30%. Why is the elasticity computed at a point (in question 4 above) different from this elasticity?