Mr.O.B.Kandle has a utility function c 1 c 2 , where c 1 is his consumption in period 1 and c 2 is his consumption in period 2.He has no income in period 2.If he had an income of $40,000 in period 1 and the interest rate increased from 10 to 19%,A) his savings would not change but his consumption in period 2 would increase by 1,800.B) his savings would increase by 9% and his consumption in period 2 would also increase.C) his consumption in both periods would decrease.D) his consumption in both periods would increase.E) his consumption in period 1 would decrease by 19% and his consumption in period 2 would also decrease.

Question

Mr.O.B.Kandle  has a utility function c 1 c 2 , where c 1  is his consumption in period 1 and c 2  is his consumption in period 2.He has no income in period 2.If he had an income of $40,000 in period 1 and the interest rate increased from 10 to 19%,A) his savings would not change but his consumption in period 2 would increase by 1,800.B) his savings would increase by 9% and his consumption in period 2 would also increase.C) his consumption in both periods would decrease.D) his consumption in both periods would increase.E) his consumption in period 1 would decrease by 19% and his consumption in period 2 would also decrease.

pascal kyala · Accepted Answer

Final Answer : A, Explanation :  With an increase in the interest rate from 10% to 19%, the return on savings increases. This means that for any given amount saved, Mr. O.B. Kandle would earn more interest, leading to a higher income in period 2, which he can use for consumption. Therefore, his consumption in period 2 would increase due to the higher interest income, even though his initial savings decision from period 1 might not change. The specific numbers (e.g., increase by 1,800) are not derived from the information given, but the direction of the effect (increase in period 2 consumption) is correct based on the interest rate increase.

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