1. Consider the two-period endowment economy discussed in class.The economy is populated by m consumers. The lifetime utilityfunction of each consumer is time separable and is given byU (c, c') = u(c) + Bu(c) 0 (c) Suppose the government runs a redistributive tax scheme. Thatis, the government redistributes income across the two groupsby setting t₁ = = ¹ and to = −ÿ in the current period andt' = and t₁ = y in the future period. Find the equilibriumlevel of the real interest rate under this tax scheme. Is there anylending in equilibrium? Explain your results intuitively.(d) Use a graphical analysis to analyse the effects of the introductionof the new tax scheme on the consumer choice of group b.(e) Does the new tax scheme imply a Pareto improvement comparedto the initial situation with no taxes? Explain, also intuitively,why or why not.

The real interest rate effect refers to the impact of changes in interest rates on economic…

Answered: Consider the two-period endowment…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please *provide and *recheck *clear and complete *step-by-step solutions in *scanned handwriting or *computerized output. Thanks.
While individuals face trade-offs in consumption, as shown by the budget constraint. there is no such trade-off for society in terms of production or consumpotion True False
Question4-5
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a) Present the Lagrangian (constrained maximisation) problem for the household under this modified specification and derive the first order conditions in this case. Hint: the household chooses c1, c2, ℓ1 and ℓ2. b) Use the first order conditions for ℓ1 and ℓ2 to derive an expression for the relative amount of leisure time chosen by the household over the two periods, i.e. derive an expression for (1–ℓ1)/(1–ℓ2). Explain how an increase in the relative wage (w2/w1) affects the household’s decision about how much leisure to enjoy in each period. c) Calculate the intertemporal elasticity of substitution between period 1 and period 2 leisure time in this case. Explain how the magnitude of this elasticity influences the household’s decision-making in the model. d) Use the first order conditions for c1 and c2 to derive an expression for the relative amount of consumption chosen by the household over the two time periods, i.e. derive an expression for c2/c1. Provide an economic interpretation…
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Consider the two-period endowment economy discussed in class. The economy is populated by m consumers. The lifetime utility function of each consumer is time separable and is given by U(c, c') = u(c) + Bu(c) 0