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.
So how to explain b and c?
Solutions
Rahul Sunny answered 1 year 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...
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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
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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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