Question
In: Economics
Suppose a person’s life is divided into two main blocks, periods 1 and 2. The consumer...
Suppose a person’s life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the two periods. In particular, preferences are such that c2 = 0.5 ∗ c1. Income in the two periods is equal to y1 = 500 and y2 = 1000, and income taxes are proportional τ1 = 50% and τ2 = 50%. The real interest rate is r = 0%.
(a) What is the present value of lifetime resources (PVLR)? What is the highest feasible consumption in the current period? What is the highest feasible consumption in the future period?
(b) Find the optimal consumption in each period (c ∗ 1 , c∗ 2 ) and the amount of saving/borrowing. Comment on your findings.
(c) What happens to the consumption and saving choices if the real interest rate is r = 100% and there are no taxes (τ1 = τ2 = 0%)? Comment on your findings.
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
Suppose a person’s life is divided into two main blocks, periods 1 and 2. The consumer...
Suppose a person’s life is divided into two main blocks, periods
1 and 2. The consumer does not desire to perfectly smooth
consumption over the two periods. In particular, preferences are
such that c2 = 0.5 ∗ c1. Income in the two periods is equal to y1 =
500 and y2 = 1000, and income taxes are proportional τ1 = 50% and
τ2 = 50%. The real interest rate is r = 0%.
(a) What is the present value of...
Suppose a person’s life is divided into two main blocks, periods 1 and 2. The consumer...
Suppose a person’s life is divided into two main blocks, periods
1 and 2. The consumer does not desire to perfectly smooth
consumption over the two periods. In particular, preferences are
such that c2 = 0.5 ∗ c1. Income in the two periods is equal to y1 =
500 and y2 = 1000, and income taxes are proportional τ1 = 50% and
τ2 = 50%. The real interest rate is r = 0%.
(a) What is the present value of...
Suppose that a consumer lives for two periods: working age and retirement age. The consumer works...
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retirement age. The consumer works during their working age, and
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a) Write out the consumer’s budget constraint. Draw the budget
constraint, with correct labelling.
b) Briefly explain how the following variables are likely to
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Discount rate, (ii) interest rate, (iii) uncertainty about
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Assume a consumer lives for two periods. His income and consumption in the two periods are...
Assume a consumer lives for two periods. His income and
consumption in the two periods are Y1 and C1,
and Y2 and C2 respectively. Ignore price
level changes and further assume that this consumer saves income
(S) in the first period and this saving earns interest. With
consumption in two periods being constrained by income in the two
periods derive the intertemporal budget constraint.
Consider an individual who lives for two periods t = 1, 2. Suppose she is in...
Consider an individual who lives for two periods t = 1, 2.
Suppose she is in debt and, given an interest rate r, she optimally
decides to consume (C1;C2). Now, imagine that the interest rate r
falls. What do you expect to happen to her optimal consumption in
the two periods? Explain your answer referring to income and
substitution e§ects, to the budget constraints, and the Euler
equation.
Suppose there are only two time periods, today (period 1) and tomorrow (period 2), and only...
Suppose there are only two time periods, today (period 1) and
tomorrow (period 2), and only one consumption good, let’s call it
food. Assume that food is a perfectly divisible good. Let c1 and c2
denote the amount of food consumed today and tomorrow,
respectively. Note that here we use subscripts to denote time
periods. But you should think of food today and food tomorrow as
two different commodities. The price of food today is equal to p1 =
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Suppose we can think of dividing a person’s working years up into three periods. The person...
Suppose we can think of dividing a person’s working years up
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period 1, $110k in period 2, and $90k in period 3. The second is to
spend $50k to attend college in period 1, then earn $180k in each
of periods 2 and 3. The third is to attend college in period 1 (as
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Suppose Fred and Barney have different time discount rates.There are two periods of life: “young”,...
Suppose Fred and Barney have different time discount rates.
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Suppose Fred and Barney have different time discount rates. There are two periods of life: “young”,...
Suppose Fred and Barney have different time discount rates.
There are two periods of life: “young”, and “old”. Fred’s present
value of receiving a dollar next period is given by $1/(1+r),
r=0.25 whereas Barney’s value for r is 0.05. Fred and Barney are
currently “young”, living in Colorado, and deciding whether to
become marijuana smokers. Suppose all utility is viewed in dollars,
and they both value the current (when “young”) utility of smoking
to be $10,000 and they both understand...
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