An individual lives two periods, 0 and 1. The income is 14,000 in period 0 and 5,000 in period 1. The individual's marginal utility is: K – Co in period 0 and 8(K – C1) in period 1, where Co is the consumption in period 0, C1 the consumption in period 1 and 8 a discount rate. K is a constant (higher than the consumption in each period). Suppose that the person can save or borrow from the bank from period 0 to period 1 with a 25% interest rate. Set the discount rate & to 0.8. a) How much will the individual consume in the two periods? How much will she save? b) A National Insurance scheme (pension system) is established. The individual must pay 4,500 in period 0 and receives the same amount with interests in addition to her income in period 1. What will the consumption and savings be in the two periods if the National Insurance scheme uses the same interest rate as the bank?

An individual lives two periods, 0 and 1. The income is 14,000 in period 0 and 5,000 in period 1. The individual's marginal utility is: K – Co in period 0 and 8(K – C1) in period 1, where Co is the consumption in period 0, C1 the consumption in period 1 and 8 a discount rate. K is a constant (higher than the consumption in each period). Suppose that the person can save or borrow from the bank from period 0 to period 1 with a 25% interest rate. Set the discount rate & to 0.8. a) How much will the individual consume in the two periods? How much will she save? b) A National Insurance scheme (pension system) is established. The individual must pay 4,500 in period 0 and receives the same amount with interests in addition to her income in period 1. What will the consumption and savings be in the two periods if the National Insurance scheme uses the same interest rate as the bank?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.11P

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