Assume that Mr. R.T. Jones has the following preferences regarding current and future consumption.  U(c₁,c₂) = c₁^(1/2) c₂^(1/2)  where c1 is current consumption and  c2 is future consumption. 

1)    Mr. Jones will earn $20,000 this year and $30,000 next year.  At an interest rate of 15%, what is his optimal consumption bundle?  Is he a saver or a borrower?

2)    Use Slutsky's equation and a graph to explain what would happen to current consumption if the interest rate decreases.

3)    If Mr. Jones is planning on retiring after this year, how much would he need to earn this year in order to be as well off as he would be with his earning profile in #1?  Assume interest rate is 15%.

4)    Suppose Mr. Jones is asked to choose between two bundles (c₁,c₂) = (25,16) and (c₁,c₂) = (9,36).  Which one would he choose?

5)    Now suppose Mr. Jones is asked to choose between two income vectors (m₁,m₂) = (25,16) and (m₁,m₂) = (9,36).  Which one would he choose?

6)    Finally, suppose that (m₁,m₂) = (110,100), p₁=1 and r=0.  What are the INFLATION rates that make him a saver and what INFLATION rates make him a borrower?