QUESTION ONEConsider a model with two periods, each with one composite consumption good. Pricesare the stable and normalized to 1. Suppose a consumer is endowed with income 20 in thefirst period and 60 in the second period. The consumer receives a 10% interest rate onsavings and is subject to a 20% interest rate on borrowing. Regulations prohibit theconsumer from borrowing more than 20.(a) Find this consumer's budget constraint.(b) Carefully graph the budget set. Label all intercepts.

In financial matters, a budget constraints addresses every one of the blends of labor and products…

Consider a model with two periods, each with one composite consumption go are the stable and normalized to 1. Suppose a consumer is endowed with incom first period and 60 in the second period. The consumer receives a 10% intere savings and is subject to a 20% interest rate on borrowing. Regulations pr consumer from borrowing more than 20. (a) Find this consumer's budget constraint. (b) Carefully graph the budget set. Label all intercepts.

Consider a model with two periods, each with one composite consumption go are the stable and normalized to 1. Suppose a consumer is endowed with incom first period and 60 in the second period. The consumer receives a 10% intere savings and is subject to a 20% interest rate on borrowing. Regulations pr consumer from borrowing more than 20. (a) Find this consumer's budget constraint. (b) Carefully graph the budget set. Label all intercepts.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Problem 12
1. Consider a two-period model in which you work and save in the initial period (period 0) and live off savings and the interest from savings in retirement (period 1). Suppose that income in period 0 is $250,000, income in period 1 is $0, and the interest rate is 50%. a. Draw the budget line. b. Draw an indifference curve consistent with a person whose preferences causes them to equalize their consumption in period 0 and period 1. c. Savings are $_ d. Draw the after-tax budget line if a personal income tax is introduced with a marginal tax rate of t= 40%. e. Suppose that preferences are such that after tax consumption is equalized in period 0 and period 1. On the diagram show after-tax savings. Сі ($x 1,000) 450 400 350 300 250 200 150 100 50 25 50 75 100 125 150 175 200 225 250 275 300 325 350 Со ($ x 1,000)
(Use this information to answer qustion 13 - 16) Suppose a household solves the following two-period consumption-savings problem max u(c1) + Bu(c2) {C1,C2} s.t. aw Y1 - C1 C2Y2 = (1+r) a with u(c) = √c where c₁ is consumption at time 1, c2 is consumption at time 2, ₁ is houshold income at time 1, y2 is houshold income at time 2 and w is the initial wealth. Suppose the incomes of the household are $50 in time 1 and $210 in time 2. The initial wealth is $100, the discount factor is 0.975 and interest rate is 5%. Solve for the household's choice of C1. (a) 125.12 (b) 126.58 (c) 175.16 (d) 341.88