Suppose that an individual's income is $100 the year before retirement (period 1) and
$60 the year after retirement (period 2), and that net savings over the two periods are
zero. If the individual can either borrow against future income or lend from present
income at a 5% interest rate(r),
(1) derive and plot the individual's budget constraint between period 1 and period 2.
(10%)
(2) if the individual is in equilibrium by transferring $20 of income from period 1 to
period 2, draw a figure showing how this equilibrium was reached (5%). How much
does this individual consume in period 1 and period 2 at equilibrium? (10%)
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