1. Consider a two-period model in which you work and save in the initial period (period 0) and live off savings and the interest from savings in retirement (period 1). Suppose that income in period 0 is $250,000, income in period 1 is $0, and the interest rate is 50%. a. Draw the budget line. b. Draw an indifference curve consistent with a person whose preferences causes them to equalize their consumption in period 0 and period 1. c. Savings are $

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1. Consider a two-period model in which you work and save in the initial period (period 0) and live
off savings and the interest from savings in retirement (period 1). Suppose that income in period 0
is $250,000, income in period 1 is $0, and the interest rate is 50%.
a. Draw the budget line.
b. Draw an indifference curve consistent with a person whose preferences causes them to
equalize their consumption in period 0 and period 1.
c. Savings are $
d. Draw the after-tax budget line if a personal income tax is introduced with a marginal tax
rate of t= 40%.
e. Suppose that preferences are such that after tax consumption is equalized in period 0 and
period 1. On the diagram show after-tax savings.
C1 ($ x 1,000)
450
400
350
300
250
200
150
100
50
25
50 75
100 125 150 175 200 225
250 275 300 325 350
Co ($ x 1,000)
Transcribed Image Text:1. Consider a two-period model in which you work and save in the initial period (period 0) and live off savings and the interest from savings in retirement (period 1). Suppose that income in period 0 is $250,000, income in period 1 is $0, and the interest rate is 50%. a. Draw the budget line. b. Draw an indifference curve consistent with a person whose preferences causes them to equalize their consumption in period 0 and period 1. c. Savings are $ d. Draw the after-tax budget line if a personal income tax is introduced with a marginal tax rate of t= 40%. e. Suppose that preferences are such that after tax consumption is equalized in period 0 and period 1. On the diagram show after-tax savings. C1 ($ x 1,000) 450 400 350 300 250 200 150 100 50 25 50 75 100 125 150 175 200 225 250 275 300 325 350 Co ($ x 1,000)
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