Assume a consumer has current-period income y = 200, future-period income y′ = 150, current and future taxes t = 40 and t′ = 50, respectively, and faces a market real interest rate of r = 0.05, or 5% per period. The consumer would like to consume according to the following utility function:U (c, c′ ) = ln(c) + ln(c′ ).Show mathematically the lifetime budget constraint for this consumer.Find the optimal consumption in the current and future periods and optimal saving.Suppose that instead of r = 0.05 the interest rate is r = 0.1. Repeat parts (a) and (b). Does the substitution effect or the income effect dominate?

The substitution effect occurs when the price of a good or service changes, and consumers substitute…

Answered: Assume a consumer has current-period…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume a consumer has current-period income y = 200, future-period income y′ = 150, current and future taxes t = 40 and t′ = 50, respectively, and faces a market real interest rate of r = 0.05, or 5% per period. The consumer would like to consume according to the following utility function:

U (c, c′ ) = ln(c) + ln(c′ ).

Show mathematically the lifetime budget constraint for this consumer.
Find the optimal consumption in the current and future periods and optimal saving.
Suppose that instead of r = 0.05 the interest rate is r = 0.1. Repeat parts (a) and (b). Does the substitution effect or the income effect dominate?

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