Thus, the maximum the investor can consume in the first period is $19,524. This is indicated by point C in Figure 1.1. Note that points A, B, and C lie along a straight line. This did not happen by accident. In fact, all of the enormous possible patterns of consumption in periods 1 and 2 will lie along this straight line. Let us see why.

The amount the investor consumes in the two periods is constrained by the amount of income the investor has available in the two periods. Let C1 be the consumption in period 1 and C2 be the consumption in period 2. The amount consumed in period 2 is the income in period 2 of $10,000 plus the period 2 value of the savings in period 1. Remember that the value of period 1 savings can be negative, for the investor could have dissaved. That is,

Consumption in period 1 Figure 1.1 The investor's opportunity set.

he could have borrowed in period 1 and consumed more than his period 1 income. As of period 2, the value of the savings in period 1 is the amount saved in period 1 ($10,000 minus what is consumed) plus accumulated interest. Putting this in equation form we have

Period 2

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