Asked by Yania Isabel Romero on Apr 29, 2024
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Ophelia says, "If I could lend money at the rates I must pay to borrow, I would.And if I could borrow money at the rates I receive when I lend, I would again.But forsooth, although I spend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational.Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a different interest rate when she borrows than she gets when she lends.Explain what happens in words.
Interest Rate
A cost, depicted as a proportion of the borrowed sum, which a lender demands from a borrower in exchange for asset usage.
Rational Behavior
A theory in economics suggesting that individuals make decisions based on maximizing utility and firms aim to maximize profits.
Smooth Convex Preferences
Preferences characterized by continuous and consistently increasing utility, indicating a reasoned and balanced choice pattern.
- Learn about the role of interest rates in shaping consumer behavior regarding saving and borrowing.
- Acquire insight into how the interest rates attached to savings and loans affect decisions on investments.
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Learning Objectives
- Learn about the role of interest rates in shaping consumer behavior regarding saving and borrowing.
- Acquire insight into how the interest rates attached to savings and loans affect decisions on investments.
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