Assume a consumer has current-period income y=200, future-period income y'=150, current and future taxes t=40 and t'=50, respectively, and faces a market real interest rate of r=0.05, or 5% per period. The consumer would like to consume equal amounts in both periods; that is, he or she would like to set c=c', if possible. However, this consumer is faced with a credit market imperfection in that he or she cannot borrow at all; that is, saving s20. (a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. (b) Calculate his or her optimal current-period and future-period consumption and optimal saving and show this in your diagram. (c) Suppose that everything remains unchanged, except that now t=20 and t'=71. Calculate the effects on current and future consumption and optimal saving and show this in your diagram. (d) Now, suppose alternatively that y=100. Repeat parts (a) to (c) and explain any differences.

Assume a consumer has current-period income y=200, future-period income y'=150, current and future taxes t=40 and t'=50, respectively, and faces a market real interest rate of r=0.05, or 5% per period. The consumer would like to consume equal amounts in both periods; that is, he or she would like to set c=c', if possible. However, this consumer is faced with a credit market imperfection in that he or she cannot borrow at all; that is, saving s20. (a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. (b) Calculate his or her optimal current-period and future-period consumption and optimal saving and show this in your diagram. (c) Suppose that everything remains unchanged, except that now t=20 and t'=71. Calculate the effects on current and future consumption and optimal saving and show this in your diagram. (d) Now, suppose alternatively that y=100. Repeat parts (a) to (c) and explain any differences.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.7P

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Assume a consumer who has current period income y = 200 , future-period income y' = 150, current and future taxes t = 40 and t' = 50, respectively and faces a market real interest rate ofr 005, or 5% per period. The consumer would like to consume equal amounts in both periods, that is, he or she would like to set c = c', if possible. However, this consumer is a faced with a credit market imperfections, in that he or she cannot borrow at all, that is, s>or=20. (a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. (b) Calculate his or her optimal current period and future-period consumption and optimal, saving, and show this in your diagram.
Assume a consumer who has current period income y = 200 , future-period income y' = 150, current and future taxes t = 40 and t' = 50, respectively and faces a market real interest rate ofr 005, or 5% per period. The consumer would like to consume equal amounts in both periods, that is, he or she would like to set c = c', if possible. However, this consumer is a faced with a credit market imperfections, in that he or she cannot borrow at all, that is, s>or=20. (a) Show the consumer's lifetime budget constraint and indifference curves in a diagram. Calculate his or her optimal current period and future-period consumption and optimal, saving, and show this in your diagram. (b) Suppose that everything remains unchanged. except that now t = 20 and t' = 71. Calculate the effects on current and future con sumption and optimal saving, and show this in your diagram (d) Now, suppose alternatively that y = 100. Repeat parts (a) and (b), and explain any differences.
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