Graphically demonstrate the fisher separation theoreem for the case where an individual ends up lending infinancial markets?

Answer 1

The Fisher separation theorem states that an individual's investment decisions can be separated from their consumption decisions. Graphically, this can be represented by an indifference curve diagram where the budget constraint shifts due to lending in financial markets. When an individual lends, they effectively alter their consumption possibilities by moving along their indifference curve to a point where they can achieve a higher level of utility through interest income, allowing for future consumption. The optimal investment choice lies where the highest indifference curve is tangent to the new budget constraint, demonstrating that the individual focuses on maximizing utility independently of their current consumption preferences.