Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt's will require that Ali spend the money before December 31, 2009

Problem 1: Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt’s will require that Ali spend the money before December 31, 2009. He has two spending options: He can spend the amount either in 2008 or in 2009. Suppose this is Ali’s only source of income and the interest rate on loans or savings is 10 percent.

(a) How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend in 2009 if he only consumes in 2009?                                                     In 2008$10,000 of the interest rate$10,000*10/100=$1000 interest rate*1yearAmount he spends=$10,000-1000$9,000In 2009$10,000 of interest rate*2 years$10,000*10/100*2Interest=$2,000Amount he spends=$10,000-2000$8,000       (b) What is the opportunity cost of consuming $1.00 in 2008 in terms of forgone consumption in 2009? Draw Ali’s budget constraint and optimal consumption bundle, considering that the spending in 2008 is measured along the horizontal axis.If Ali consumes $1 in 2008, it would be advantageous for him because he would not be charged a big interest rate for example, in 2008, he would be charged an interest of $0.1 while he consumes $1 in 2009, and he would be liable of $ 0.2 interest.

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