Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Question
Chapter 17, Problem 17.8P
a)
To determine
To plot: Graphical representation of initial equilibrium and to indicate total value of current-period savings.
b)
To determine
To know:Alteration in budget constraint.
c)
To determine
To know:Measurement of
e)
To determine
To know:Measurement of capital gains.
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A consumer's current income (y) is 200 and the future income ( t.') is 240. A current lump sum tax (t) of 10 is paid and the tax in the next period (t') is 15. The real interest rate is 20% for each period. Please assume that current and future consumption are complements. and the consumer always prefers to have one unit of current consumption and two units of consumption in the future.Calculate the consumer's lifetime wealth.Calculate the optimal current and future consumption and the optimal current and future savings. Is the consumer a lender or a borrower? How does he she. as a lender or a borrower. affect the future consumption?
A consumer's current income (y) is 200 and the future income ( t.') is 240. A current lump sum tax (t) of 10 is paid and the tax in the next period (t) is 15. The real interest rate is 20% for each period. Please assume that current and future consumption are complements. and the consumer always prefers to have one unit of current consumption and two units of consumption in the future.
Calculate the optimal current and future consumption and the optimal current and future savings. Is the consumer a lender or a borrower? How does he she. as a lender or a borrower. affect the future consumption?
Q) Assume consumers with standard preferences live for two periods. They receive an income in each period (? and ?′) and pay lump-sum taxes to the government (? and ?′). Credit markets are not perfect, and borrowers are charged a higher interest rate than lenders. The government never defaults, and faces the lenders’ interest rate whether it borrows or lends. Which are true?
a) The number of lenders is equal to the number of borrowers
b) A reduction in taxes in the current period without changes in the lifetime burden of taxes increases
current consumption for a lender
c) A borrower is better off if there is a reduction in the interest rate paid by borrowers
d) A borrower is better off if there is a reduction in the interest rate paid by borrowers, but only if the
substitution effect dominates the income effect
e) A reduction in taxes in the current period without changes in the lifetime burden of taxes may
transform a borrower into a lender
Chapter 17 Solutions
Microeconomic Theory
Knowledge Booster
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- Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds tofall and the level of investment spending toincrease . Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate tofall and the level of saving tofall . Scenario 3: Initially, the government's budget is balanced; then…arrow_forwardAs a hypothetical case, suppose the typical individual has a utility function expressed as U = (C – 50)*(L – 10), where C is consumption and L is leisure time. The current wage, w, is $5 and she has a weekly return on assets of V = $100. She only has 60 hours per week to divide between work hours, h, and Leisure. A number of countries and communities are considering implementing a “Guaranteed Basic Income” as policy. A “Guaranteed Basic Income” is a government payment of a fixed a amount of money for each person Suppose the country of interest sets the weekly payment at $100. i) Using the Neo-classical labor supply with reference to specific numerical values discuss the consequences of the above “Guaranteed Basic Income”. ii) Using the basic Supply and Demand for labor approach discuss the consequences of the “Guaranteed Basic Income” policy on the overall labor market. iii) Using a feedback approach, from the Neo-classical labor supply to market equilibrium and back to labor…arrow_forwardConsider an individual who lives for two periods and has utility of lifetime consumption U = log(C1) + 1/1+δ log(C2), where C1 and C2 are the consumption levels in the first and second period respectively, and δ, 0 1 > 0 in the first period and no income in the second period, so Y2 = 0. He can transfer some income to the second period at a before-tax rate of return of r, so saving $S in the first period gives $[1 + r]S in the second period. The government levies a capital tax at rate τ on capital income received in the second period. The tax proceeds are paid as a lump-sum transfer to the following generation. The present generation does not care about the next one. a. What is the lifetime consumption profile of this individual? What is his lifetime indirect utility function expressed as a function of Y1 and b. Evaluate the change in initial income Y1 that is required to compensate the individual for the welfare loss due to the capital income tax τ. c. What is…arrow_forward
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