Consider a representative consumer, whose utility can be summarized by the lifetime utility function Ct Bt...

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Consider a representative consumer, whose utility can be summarized by the lifetime utility function Ct Bt -0 1-0 t=0 Stocks held at the beginning of period t pay a dividend Dt. Suppose that the dividends are taxed at a rate tp, i.e. for every dollar of dividends an individual only recieves (1 - tp) dollars. Denoting stock prices by St, and the asset position of the individual at the beginning of period t by at-1, (a) Write down the budget constraint for the representative consumer in period t. (b) Write down the sequential Lagrangian, and derive the first order con- ditions for consumption at time t, time t + 1 and the choice of asset position at (c) Derive the equation for stock prices St (d) Suppose there is an announcement in 2018 that the taxes on dividends are going to increase in 2019. What does your answer to part (c) predict will be the effect on stock prices in 2017? Consider a representative consumer, whose utility can be summarized by the lifetime utility function Ct Bt -0 1-0 t=0 Stocks held at the beginning of period t pay a dividend Dt. Suppose that the dividends are taxed at a rate tp, i.e. for every dollar of dividends an individual only recieves (1 - tp) dollars. Denoting stock prices by St, and the asset position of the individual at the beginning of period t by at-1, (a) Write down the budget constraint for the representative consumer in period t. (b) Write down the sequential Lagrangian, and derive the first order con- ditions for consumption at time t, time t + 1 and the choice of asset position at (c) Derive the equation for stock prices St (d) Suppose there is an announcement in 2018 that the taxes on dividends are going to increase in 2019. What does your answer to part (c) predict will be the effect on stock prices in 2017?

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