Consider the two-period life-cycle model and suppose that individuals receive labor income the first and second periods, Y1 and Y2. Denote by r the interest rate and assume thatr = 0.1 (10%). There are two individuals in this economy, agent A and agent B. They both have the same labor income, Yy = 100, Y2 = 50. Thus, there is total equality in the labor income distribution. The utility function of agenti, i = A, B, is U,(c1, c2) = In(c1)+ ß In(c2), where c; consumption in the first period, and c2 consumption in the second period (price of c and c2 equal to one). Agents differ in the value of ß and Ba = 0.7 and ße = 0.6. A) Find the value of th wealth, W, of each individual in the second period (i.e. their savings before the return they g on it ). Is the distribution of wealth more or less equal than the distribution of income? question. If the government establishes a B) Continue with the same economy as in the previ tax rate of 25% on the capital income (and the government does not return that revenue to the agents), what happens with the distribution of wealth? Select one: O a. The distribution of wealth becomes more unequal than before because now WA=13.98103 and Wg=8.2202 Agent B only has 58.7955% of the wealth of A, i.e., 8.22021/13.98103 =0.587955 O b. The distribution of wealth becomes more unequal than before because now WA=14.88150 and Wg=9.0102 Agent B only has 60.5465% of the wealth of A, i.e., 9.01023/14.88150 =0.605465 O c. The distribution of wealth does not change because the agents have preferences such that savings do not depend on the tax rate on capital income. O d. The distribution of wealth becomes more unequal than before because now WA 13.8167 and Wg 8.43023 Agent B only has 61.0149% of the wealth of A, i.e., 8.43023/13.8167 =0.610149

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