Question 1An 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 functionu = In (C) + 0.95 In (C2)Where Ci 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 thisperson 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 inperiod 1 is reduced to 15%? Assume that the government adjusts its spending sothey do not have to increase taxes in period 2. Explain your answer.

Let m1 and m2 stand for endowment in period 1 and endowment in period 2 respectively. Let r denote…

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.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter27: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 9CQ

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