An agent lives for 2 periods and she receives an endowment of £11,000 in period 1, and £18,000 in period 2. She has to pay a tax of 20% on her period 1 endowment, and 30% on her period 2 endowment. The real interest rate in the economy is 5%. a) Write down the agent's intertemporal budget constraint making sure you evalu- ate its slope and both intercepts. b) The agent's preferences, her utility U, is described by the following function u = In (C,) + 0.95 In (C2) Where C, and C2 are consumption in periods 1 and 2 respectively. Find the opti- mal consumption in periods 1 and 2 and represent this point graphically. Is this person a net saver or a net borrower in period 1? c) What would happen to the agent's savings in period 1 if the tax rate she pays in period 1 is reduced to 15%? Assume that the government adjusts its spending so they do not have to increase taxes in period 2. Explain your answer.
An agent lives for 2 periods and she receives an endowment of £11,000 in period 1, and £18,000 in period 2. She has to pay a tax of 20% on her period 1 endowment, and 30% on her period 2 endowment. The real interest rate in the economy is 5%. a) Write down the agent's intertemporal budget constraint making sure you evalu- ate its slope and both intercepts. b) The agent's preferences, her utility U, is described by the following function u = In (C,) + 0.95 In (C2) Where C, and C2 are consumption in periods 1 and 2 respectively. Find the opti- mal consumption in periods 1 and 2 and represent this point graphically. Is this person a net saver or a net borrower in period 1? c) What would happen to the agent's savings in period 1 if the tax rate she pays in period 1 is reduced to 15%? Assume that the government adjusts its spending so they do not have to increase taxes in period 2. Explain your answer.
Chapter2: Mathematics For Microeconomics
Section: Chapter Questions
Problem 2.4P
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