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- Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as Max{logc1+logc2} c1+a1=y1-τ1+(1+r)a0 c2=y2-τ2+(1+r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by where g1 and g2 are exogenous government expenditures in the two periods. (b). Show…Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…
- Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as below (see image): Question: Show consumption c1 and c2 (you can use algebraic or graphical methods). In theanswer, you should discuss whether a1 ≥ 0 or a1 < 0 and provide an economic interpretation.What determine(s) the sign of a1 and why?Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as a) Explain what is meant by a representative household. Briefly explain the budget constraints of the representative households and of the government. Explain the role played by the assumption that the representative households lives for only two periods and the assumption of “no discounting”.Indicate whether the statement is true or false, and justify your answer.If a person discounts utility from future periods, her preferences are time-inconsistent because she does not value utility in all periods equally.
- There are some simplifying assumptions in order to generate simple expressions. One of these assumptions is that r (interest rate) = ρ (rate at which household discounts future). Suppose we relaxed this assumption (i.e. allowed r to differ from ρ). Two results of the model are: i) The household keeps the expected value of consumption constant over time. ii) The household responds differently to permanent versus temporary income changes. Discuss the implications of allowing r to differ from ρ on each of these resultsPresent the classical model of choice under uncertainty. What are the five assump- tions which characterize the Von-Neumann-Morgenstern expected utility repre- sentation?Indicate whether the statement is true or false, and justify your answer.Suppose an individual prefers to drink beer during college but enjoys winemore during middle age. This is a classic example of time-inconsistent preferences.
- "The non-liner transformation of the vNM expected utility function fails to reflect the underlying preference relation." Explain the above statement.Based on the model in the image answer the following questions: a. Write down agent period 2 and period 3 budget constraint separately. b. Set up the agent's utility maximization problem showing her choice of variables clearly. Write down the first order conditions for agent's utility maximization. c. Derive the ratio of consumption in period 2 and period 3 i.e. c2/c3 in terms of the parameter of the model. d. Explain how investment on the parameter,e, depends on value of BIn the Two Period Consumer model, the Effect from a decrease in current income is: Group of answer choices C1↑; C2↑; Savings ↑ C1↓; C2↓; Savings ↓ C1↑; C2↑; Savings ↓ C1↓; C2↓; Savings ↑ C1↑; C2↓; Savings ↑