The Intertemporal budget Constraint So (C1, C2)=(m, m2)is the consumption bundle if the consumer chooses neither to save nor to borrow 00
The Intertemporal Budget Constraint c1 c2 So (c1 , c2 ) = (m1 , m2 ) is the consumption bundle if the consumer chooses neither to save nor to borrow. m2 0 m1 0
The Intertemporal budget Constraint the future-value of the income m。十 endowment (1+rm1 2 00
The Intertemporal Budget Constraint c1 c2 m2 0 m1 0 m r m 2 1 1 + ( + ) the future-value of the income endowment
The Intertemporal budget Constraint e2,(c1,c2)=(m2+(1+rm) m。十 is the consumption bundle when all (1+rm1 period 1 income is saved. 2 00
The Intertemporal Budget Constraint c1 c2 m2 0 m1 0 is the consumption bundle when all period 1 income is saved. (c1 ,c2 ) = (0,m2 + (1+ r)m1) m r m 2 1 1 + ( + )
The Intertemporal budget Constraint Now suppose that the consumer spends everything possible on consumption in period 1, so C2=0 What is the most that the consumer can borrow in period 1 against her period 2 income of Sm2? Let b denote the amount borrowed in period 1
The Intertemporal Budget Constraint Now suppose that the consumer spends everything possible on consumption in period 1, so c2 = 0. What is the most that the consumer can borrow in period 1 against her period 2 income of $m2? Let b1 denote the amount borrowed in period 1
The Intertemporal budget Constraint Only Sm2 will be available in period 2 to pay back $b, borrowed in period 1 So b,1+r)=m2 That is, b,=m2/(1+r) So the largest possible period 1 consumption level is
The Intertemporal Budget Constraint Only $m2 will be available in period 2 to pay back $b1 borrowed in period 1. So b1 (1 + r ) = m2 . That is, b1 = m2 / (1 + r ). So the largest possible period 1 consumption level is