1. Harold's present income is $100 and his future income is $200. Harold can either borrow or save at the rate of 25%.
a. Draw Harold's budget constraint. Recognize point which corresponds to Harold's consumption if he neither borrows nor saves, and give values for the intercepts and the slope.
b. Now assume that borrowing rate-but not savings rate-changes to 60%. Add Harold's new budget constraint to your graph for Part (a). Provide value for new current-consumption intercept.
c. Assume that Harold would have consumed $180 in current period when theborrowing rate was 25%. Will Harold's utility be higher, lower, or remain same when borrowing rate increases to 60%? How can you tell?