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question #15
Suppose that there are two possible investors with entirely different preferences. Think of A as an ant,
who wishes to save for the future, and of G as a grasshopper, who would prefer to spend all his wealth
on some ephemeral frolic, taking no heed of tomorrow. Suppose that each has a nest egg of exactly
$100,000 in cash. G chooses to spend all of it today, while A prefers to invest it in the financial market.
Both have access to a well-functioning, competitive financial market, in which they can borrow and lend
at 5% interest rate.
Suppose that A and G are offered the opportunity to invest their $100,000 in a new business that a
friend is founding. This will produce a one-off surefire payment of $111,000 next year.
What would the ant (A) and grasshopper (G) do ? Would they borrow or lend? How much and when
would each consume?
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A would lend, consume 0 today and $105,000 next year
G would borrow, consume $105,714 today and 0 next year
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G would borrow, consume $111,111 today and 0 next year
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A would lend, consume 0 today and $120,000 next year
References
Multiple Choice
question #15