The consumer views present and future consumption as perfect complements and would like to consume equal amounts in both periods, i.e., . Suppose, however, that there is a credit market imperfection that prevents this consumer from borrowing at all, i.e., . a. Show the consumer's lifetime budget constraint and indifference curves on a diagram. Note that because the consumer prefers to purchase present and future consumption in equal amounts, the indifference curves will be kinked at. Note also that because the consumer cannot borrow, the budget constraint will be kinked at the consumer's initial endowment. Recall that the budget constraint is given by: Recall also that the consumer's endowment for each period can be expressed as: b. Calculate the consumer's optimal current-period and future-period consumption and optimal saving and show this in your diagram. Does the existence of the credit market imperfection affect the consumer's choices? Recall that savings is given by: c. Suppose that taxes fall in the current period but increase in the second period such that and. Calculate the effects on current and future consumption and optimal saving and show this on your diagram.

The consumer views present and future consumption as perfect complements and would like to consume equal amounts in both periods, i.e., . Suppose, however, that there is a credit market imperfection that prevents this consumer from borrowing at all, i.e., . a. Show the consumer's lifetime budget constraint and indifference curves on a diagram. Note that because the consumer prefers to purchase present and future consumption in equal amounts, the indifference curves will be kinked at. Note also that because the consumer cannot borrow, the budget constraint will be kinked at the consumer's initial endowment. Recall that the budget constraint is given by: Recall also that the consumer's endowment for each period can be expressed as: b. Calculate the consumer's optimal current-period and future-period consumption and optimal saving and show this in your diagram. Does the existence of the credit market imperfection affect the consumer's choices? Recall that savings is given by: c. Suppose that taxes fall in the current period but increase in the second period such that and. Calculate the effects on current and future consumption and optimal saving and show this on your diagram.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

The consumer views present and future consumption as perfect complements and would like to
consume equal amounts in both periods, i.e., . Suppose, however, that there is a credit market
imperfection that prevents this consumer from borrowing at all, i.e., .
a. Show the consumer's lifetime budget constraint and indifference curves on a diagram. Note that
because the consumer prefers to purchase present and future consumption in equal amounts, the
indifference curves will be kinked at. Note also that because the consumer cannot borrow, the
budget constraint will be kinked at the consumer's initial endowment. Recall that the budget
constraint is given by:
Recall also that the consumer's endowment for each period can be expressed as:
b. Calculate the consumer's optimal current-period and future-period consumption and optimal
saving and show this in your diagram. Does the existence of the credit market imperfection affect
the consumer's choices? Recall that savings is given by:
c. Suppose that taxes fall in the current period but increase in the second period such that and.
Calculate the effects on current and future consumption and optimal saving and show this on your
diagram.
d. Now, suppose that . Repeat parts a-c and explain any differences. Create a new diagram for this
part.

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6. A consumer who lives for two periods has a standard Cobb-Douglas utility func- tion: ule1, c2) = cfc, where c, = consumption in period t and a+ B = 1. Her income in period one is I1 = 500 and I2 = 400, and she can lend or borrow at interest rate r = 0.2. (a) Find the optimal consumption demand. (b) What values of a, if any, makes the consumer a borrower? Interpret this result. (c) Suppose now that a = but that r is no longer 0.2. What values of r, if any, makes the consumer a borrower? Interpret this result.
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