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A consumer receives income y in the current period and income y' in the future period, and pays taxes of t and t' in the current and future periods, respectively. The consumer can borrow and lend at the real interest rate r. This consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x, where x

A consumer receives income y in the current period and income y' in the future period, and pays taxes of t and t' in the current and future periods, respectively. The consumer can borrow and lend at the real interest rate r. This consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x, where x

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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A consumer receives income y in the current period and income y' in the future period, and pays taxes of t and t' in the current and future periods, respectively. The consumer can borrow and lend at the real interest rate r. This consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x, where x <we-y+t, with we denoting lifetime wealth. Use diagrams to determine the effects on the consumer's current consumption, future consumption, and saving of a change in x, and explain your results. In figure 1 displayed to the right, the lifetime budget constraint is line ABD. The lifetime budget constraint line becomes vertical at c = x. The consumer in this scenario has an optimal consumption bundle indicated by point H, and the corresponding indifference curve is l₁. How does a change in x affect current consumption, future consumption, and savings for the consumer? An increase in x will result in ▼savings. current consumption, An increase in x will result in ▼savings. future consumption, and In figure 2 displayed to the right, the original lifetime budget constraint is line ABD. The consumer in this scenario chooses an optimal consumption bundle at point B, and the corresponding indifference curve is l2. An increase in x produces the new lifetime budget constraint indicated by line AFG, where G-D=Ax. What are the resulting effects on the consumer's current consumption, future consumption, and savings? current consumption, future consumption, and a decrease in no change in an increase in Future Consumption, c Future Consumption, c' H B B Current Consumption, c Figure 1 D D F G Q
Transcribed Image Text:A consumer receives income y in the current period and income y' in the future period, and pays taxes of t and t' in the current and future periods, respectively. The consumer can borrow and lend at the real interest rate r. This consumer faces a constraint on how much he or she can borrow, much like the credit limit typically placed on a credit card account. That is, the consumer cannot borrow more than x, where x <we-y+t, with we denoting lifetime wealth. Use diagrams to determine the effects on the consumer's current consumption, future consumption, and saving of a change in x, and explain your results. In figure 1 displayed to the right, the lifetime budget constraint is line ABD. The lifetime budget constraint line becomes vertical at c = x. The consumer in this scenario has an optimal consumption bundle indicated by point H, and the corresponding indifference curve is l₁. How does a change in x affect current consumption, future consumption, and savings for the consumer? An increase in x will result in ▼savings. current consumption, An increase in x will result in ▼savings. future consumption, and In figure 2 displayed to the right, the original lifetime budget constraint is line ABD. The consumer in this scenario chooses an optimal consumption bundle at point B, and the corresponding indifference curve is l2. An increase in x produces the new lifetime budget constraint indicated by line AFG, where G-D=Ax. What are the resulting effects on the consumer's current consumption, future consumption, and savings? current consumption, future consumption, and a decrease in no change in an increase in Future Consumption, c Future Consumption, c' H B B Current Consumption, c Figure 1 D D F G Q
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