In this hypothetical economy. there are two consumers living over two periods of life. Ann's incomes are $50.000 in both periods. Meanwhile, Bob earns nothing in the first period but S105,000 in the second period. Both of them can borrow or lend at the interest rate r. For simplicity, assume that there are no taxes A) Ann and Bob consume $50,000 in the first period and $50,000 in the second period. Write down the lifetime budget constraint for each consumer then calculate the interest rate r. Describe the economic behaviour of each consumer. b) Suppose the interest rate increases. What will happen to Ann's consumption in the first period? Is Ann better off or worse off than before the interest rate rises? Explain your answer using an appropriate diagram

In this hypothetical economy. there are two consumers living over two periods of life. Ann's incomes are $50.000 in both periods. Meanwhile, Bob earns nothing in the first period but S105,000 in the second period. Both of them can borrow or lend at the interest rate r. For simplicity, assume that there are no taxes A) Ann and Bob consume $50,000 in the first period and $50,000 in the second period. Write down the lifetime budget constraint for each consumer then calculate the interest rate r. Describe the economic behaviour of each consumer. b) Suppose the interest rate increases. What will happen to Ann's consumption in the first period? Is Ann better off or worse off than before the interest rate rises? Explain your answer using an appropriate diagram

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Yuanyuan Qian can lend and borrow at the bank at 25 percent per period. She has (a) €20,000 in cash now. Her only investment possibility costs €32,000 now in her Youth and has a payoff of €50,000 in her Old Age. What is the most she can consume in her Youth?
Answer; A) $150,000 B) $200,000 C) $250,000 D) $50,000 E) 100,000
In this hypothetical economy, there are two consumers living over two periods of life. Ann’s incomes are $50,000 in both periods. Meanwhile, Bob earns nothing in the first period but $105,000 in the second period. Both of them can borrow or lend at the interest rate r. For simplicity, assume that there are no taxes. a) Assume that both Ann and Bob consume $50,000 in the first period and $50,000 in the second period. Write down the lifetime budget constraint for each consumer then calculate the interest rate r. Describe the economic behavior of each consumer. b) Suppose the interest rate increases. What will happen to Ann’s consumption in the first period? Is Ann better off or worse off than before the interest rate rises? Explain your answer using an appropriate diagram c) What will happen to Bob’s consumption in the first period when the interest rate increases? Is Bob better off or worse off than before the interest rate increases? Explain your answer using an…
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Felice lives and works for two periods. In the first period, she earns 520 coconuts and in the second period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes.a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%. Suppose also that she likes to consume today 240 coconuts. Draw herbudget constraint including both intercepts, her endowment point including its coordinates, and use an indifference curve to show her optimal consumption point and its coordinates.b. Suppose that the government cuts taxes by 10 coconuts. What will the government have to do to taxes in the future period to meet its lifetime budget constraint?c. What is the effect of the government’s action on Felice’s lifetime wealth, budget constraint and endowment point? Show and explain.d. What is the effect of the tax cut on her current consumption and welfare? Does the Ricardian equivalence hold? Explain!e. Now suppose that the economy enters a recession, and some…
Explain which of the graphs below best explains how private investment changes if wealth goes up. Use the terms interest rate and loanable funds to motivate your answer in three or fewer sentences. Sa De De Loanable funds Loanable funds S, Do De Loanable funds Loanable funds (click on the image to enlarge it)
Felice lives and works for two periods. In the first period, she earns 520 coconuts and in the second period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes.a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%. Suppose also that she likes to consume today 240 coconuts. Draw herbudget constraint including both intercepts, her endowment point including its coordinates, and use an indifference curve to show her optimal consumption point and its coordinates.b. Suppose that the government cuts taxes by 10 coconuts. What will the government have to do to taxes in the future period to meet its lifetime budget constraint?c. What is the effect of the government’s action on Felice’s lifetime wealth, budget constraint and endowment point? Show and explain.d. What is the effect of the tax cut on her current consumption and welfare? Does the Ricardian equivalence hold? Explain!e. Now suppose that the economy enters a recession, and some…
Q) Assume consumers with standard preferences live for two periods. They receive an income in each period (? and ?′) and pay lump-sum taxes to the government (? and ?′). Credit markets are not perfect, and borrowers are charged a higher interest rate than lenders. The government never defaults, and faces the lenders’ interest rate whether it borrows or lends. Which are true? a) The number of lenders is equal to the number of borrowers b) A reduction in taxes in the current period without changes in the lifetime burden of taxes increases current consumption for a lender c) A borrower is better off if there is a reduction in the interest rate paid by borrowers d) A borrower is better off if there is a reduction in the interest rate paid by borrowers, but only if the substitution effect dominates the income effect e) A reduction in taxes in the current period without changes in the lifetime burden of taxes may transform a borrower into a lender
b. Using Fisher's Intertemporal Choice model, consider the following scenario: Suppose Milo earns $1,750 in the first period and $2,500 in the second period. If he consumes $1,200 in the first period and $1,550 in the second period, what is the i. interest rate? ii. Now if Milo's consumption changes to $1,800 in the first period and $2,000 in the second period, what is the new interest rate?
In this hypothetical economy, there are two consumers living over two periods of life. Ann's incomes are $50,000 in both periods. Meanwhile, Bob earns nothing in the first period but $105,000 in the second period. Both of them can borrow or lend at the interest rate r. For simplicity, assume that there are no taxes. a)Assume that both Ann and Bob consume $50,000 in the first period and $50,000 in the second period. Write down the lifetime budget constraint for each consumer then calculate the interest rate r. Describe the economic behaviour of each consumer. b) Suppose the interest rate increases. What will happen to Ann's consumption in the first period? Is Ann better off or worse off than before the interest rate rises? Explain your answer using an appropriate diagram c) What will happen to Bob's consumption in the first period when the interest rate increases? Is Bob better off or worse off than before the interest rate increases? Explain your answer using an appropriate diagram.
2. An individual has an intertemporal utility function that is rational, monotonic, and strictly convex. She can borrow/lend at the interest rate, r, but does not have access to human capital. She is currently consuming a bundle such that MRSx₁x2 >1+r. How many of the following statements COULD BE true? [HINT: try drawing a picture] 0 X1x2 The bundle is optimal (i.e. maximizes her utility). If the individual is consuming both goods, she could do better by consuming less today and consuming more tomorrow. She is at a corner solution in which she only consumes tomorrow. a. 1 b. 2 c. 3 V. d. None of the above statements could be true.
a, b and c