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 equal amounts in both periods; that is, he or she would like to set c=c', if possible. However, this consumer is faced with a credit market imperfection in that he or she cannot borrow at all; that is, saving s20. (a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. (b) Calculate his or her optimal current-period and future-period consumption and optimal saving and show this in your diagram. (c) Suppose that everything remains unchanged, except that now t=20 and t'=71. Calculate the effects on current and future consumption and optimal saving and show this in your diagram. (d) Now, suppose alternatively that y=100. Repeat parts (a) to (c) and explain any differences.

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 equal amounts in both periods; that is, he or she would like to set c=c', if possible. However, this consumer is faced with a credit market imperfection in that he or she cannot borrow at all; that is, saving s20. (a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. (b) Calculate his or her optimal current-period and future-period consumption and optimal saving and show this in your diagram. (c) Suppose that everything remains unchanged, except that now t=20 and t'=71. Calculate the effects on current and future consumption and optimal saving and show this in your diagram. (d) Now, suppose alternatively that y=100. Repeat parts (a) to (c) and explain any differences.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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