Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider an individual who lives for two periods and has utility of lifetime consumption U = log(C1) + 1/1+δ log(C2), where C1 and C2 are the consumption levels in the first and second period respectively, and δ, 0 1 > 0 in the first period and no income in the second period, so Y2 = 0. He can transfer some income to the second period at a before-tax
a. What is the lifetime consumption profile of this individual? What is his lifetime indirect utility function expressed as a function of Y1 and
b. Evaluate the change in initial income Y1 that is required to compensate the individual for the welfare loss due to the capital income tax τ.
c. What is the impact of a tax rate change on consumption level in the first period? And in the second period? What conclusion about the welfare cost of capital income
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