(Chapter 9) Consider a two-period intertemporal model. Consumers have the preference U(c, c') = Vc+ BVc, where B = 0.95 is the discounting factor. A consumer's income in the current period is y = 150, and income in the future period is y' = 75. She pays lump-sum taxes t = 20 in the current period and t' = 10 in the future period. The real interest rate is 0.15 (or 15%). (Hint: recall that MRSd = MU5) a. Calculate the representative consumer's lifetime wealth and optimal choice of consumption each period. Show your work in a diagram with the consumer's budget constraint and indif- ference curve. b. Now assume the B drops to 0.90, redo part (a). c. Explain the difference between (a) and (b).

(Chapter 9) Consider a two-period intertemporal model. Consumers have the preference U(c, c') = Vc+ BVc, where B = 0.95 is the discounting factor. A consumer's income in the current period is y = 150, and income in the future period is y' = 75. She pays lump-sum taxes t = 20 in the current period and t' = 10 in the future period. The real interest rate is 0.15 (or 15%). (Hint: recall that MRSd = MU5) a. Calculate the representative consumer's lifetime wealth and optimal choice of consumption each period. Show your work in a diagram with the consumer's budget constraint and indif- ference curve. b. Now assume the B drops to 0.90, redo part (a). c. Explain the difference between (a) and (b).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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