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In: Economics

Consider a general model of intertemporal consumption. Paul lives for two periods, working in the first...

Consider a general model of intertemporal consumption. Paul lives for two periods, working in the first and retiring in the second. Paul’s income is 1000 in the first period and is 0 in the second period. He must decide how much to consume in the first period and how much to save for consumption in the second period. Any money that Paul saves in the first period will earn a 5% interest. For the questions below, you only need to write the budget constraints and don’t need to solve the maximization problem.

(a) (5 points) Write Paul’s consumption in the second period (c2) as a function of his consumption in the first period (c1). Note that any of Paul’s income in the first period that is not consumed will be saved.

(b) (5 points) If Paul must pay a 25% tax on his income in the first period, how would your answers to question (a) change?

(c) (5 points) Now assume that Paul must pay a 25% tax on his income in the first period and a 20% tax on his interest income in the second period, how do your answers to question (b) change?

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Rahul Sunny answered 8 months ago
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