5. Recall the 2-period consumption-borrowing model with imperfect information betweenborrowers and lenders, where we have the following assumptions:.Consumer lives for 2 periods; endowment in period 1 and 2 are y and y'respectively, and pays taxes t and t' in period 1 and 2 respectively.Consume c today and c' tomorrowAssume that lenders can lend at a lower interest rate than the one faced byborrowers; lend at r₁, borrow at ₂:₂ >r,2: spread arises for compensating the bank for costs of making loans;information asymmetriesrStart at a consumption point were a consumer is facing a borrowing constraint, and as suchconsumes their initial endowment. Now suppose that there is a drop in taxes today. Showgraphically what happens to the utility of this person before and after the tax decrease.zha 5

In period 1 - Income = y Taxes = t Consumption = c Therefore , budget constraint : c + S = y -…

borrowers and lenders, where we have the following assumptions: . . . Consumer lives for 2 periods; endowment in period 1 and 2 are y and y' respectively, and pays taxes t and t' in period 1 and 2 respectively. Consume c today and c' tomorrow Assume that lenders can lend at a lower interest rate than the one faced by borrowers; lend at r, borrow at ₂:₂ >r, r₂-r₁: spread arises for compensating the bank for costs of making loans; information asymmetries

borrowers and lenders, where we have the following assumptions: . . . Consumer lives for 2 periods; endowment in period 1 and 2 are y and y' respectively, and pays taxes t and t' in period 1 and 2 respectively. Consume c today and c' tomorrow Assume that lenders can lend at a lower interest rate than the one faced by borrowers; lend at r, borrow at ₂:₂ >r, r₂-r₁: spread arises for compensating the bank for costs of making loans; information asymmetries

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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