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...
Suppose that a consumer lives for two periods: working age and
retirement age. The consumer works during their working age, and
does not work during their retirement age.
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
affect how much the consumer will save (ceteris paribus): (i)
Discount rate, (ii) interest rate, (iii) uncertainty about
retirement age income.
c) Now suppose that there is a...
Retirement plans, are divided into two phases: the payments periods and the pension periods. The participants...
Retirement plans, are divided into two phases: the payments
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years) where upon retirement they are paid an annual retirement
pension. Assume the average pension period is
n2 years. If a retirement organization believes
that the participants should pay one tenth of as much as they
should get as pension every year, what is the value of
n1 and n2 that keeps the...
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 =
P....
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
into three periods. The person has three alternatives. The first is
for her to start working immediately, earning $100,000 ($100k) in
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
in the previous option), attend...
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
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become marijuana smokers. Suppose all utility is viewed in dollars,
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to be $10,000 and they both understand...
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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