7. Consider a two-period model in which a family works in the first period and earns $120,000 and works in the second period and earns $120,000. The family can save or borrow as much as they like and the interest rate is 100%. a. Draw the budget line before tax. b. Draw an indifference curve consistent with the family borrowing $40,000 in period 1. c. Suppose an income tax rate of 33.3% is imposed on labour and interest income. Draw the budget line after tax if mortgage interest is tax deductible. d. Draw the budget line after tax if mortgage interest is not tax deductible. Using indifference cuiges, show the impact of eliminating the tax deductibility of interest on borrowing. C2 ($x1000)
7. Consider a two-period model in which a family works in the first period and earns $120,000 and works in the second period and earns $120,000. The family can save or borrow as much as they like and the interest rate is 100%. a. Draw the budget line before tax. b. Draw an indifference curve consistent with the family borrowing $40,000 in period 1. c. Suppose an income tax rate of 33.3% is imposed on labour and interest income. Draw the budget line after tax if mortgage interest is tax deductible. d. Draw the budget line after tax if mortgage interest is not tax deductible. Using indifference cuiges, show the impact of eliminating the tax deductibility of interest on borrowing. C2 ($x1000)
Chapter17: Capital And Time
Section: Chapter Questions
Problem 17.8P
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![7. Consider a two-period model in which a family works in the first period and earns $120,000 and works in
the second period and earns $120,000. The family can save or borrow as much as they like and the interest
rate is 100%.
a. Draw the budget line before tax.
b. Draw an indifference curve consistent with the family borrowing $40,000 in period 1.
c. Suppose an income tax rate of 33.3% is imposed on labour and interest income. Draw the budget
line after tax if mortgage interest is tax deductible.
d. Draw the budget line after tax if mortgage interest is not tax deductible.
Using indifference cuges, show the impact of eliminating the tax deductibility of interest on borrowing.
C2 ($x1000)
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C ($x1000)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2a892482-b2ec-4850-b902-5c42e2566e8b%2F65c18fe6-f25f-4d0b-82d0-bb4af8ecb507%2Fcm0t3ad_processed.jpeg&w=3840&q=75)
Transcribed Image Text:7. Consider a two-period model in which a family works in the first period and earns $120,000 and works in
the second period and earns $120,000. The family can save or borrow as much as they like and the interest
rate is 100%.
a. Draw the budget line before tax.
b. Draw an indifference curve consistent with the family borrowing $40,000 in period 1.
c. Suppose an income tax rate of 33.3% is imposed on labour and interest income. Draw the budget
line after tax if mortgage interest is tax deductible.
d. Draw the budget line after tax if mortgage interest is not tax deductible.
Using indifference cuges, show the impact of eliminating the tax deductibility of interest on borrowing.
C2 ($x1000)
360
320
280
240
200
160
120
80
40
20
40 60
80
100 120 140 160 180 200
C ($x1000)
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