Consider the Two-Period Consumption model covered in class and assume that preferences are given by u(C,...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the Two-Period Consumption model covered in class and assume that preferences are given by u(C₁, C₂, g) = 1-o - 0 + B 1-0 C2 1-0 + In (g) The endowment profile of the representative household is e₁ for the first period and is e₂ for the second one. Finally, to transfer resources from period 1 to period 2, the agent has access to savings. The return on savings is r. Assume that a government now imposes linear taxes (i.e, proportional taxes equal to t) on endowments. The resulting tax revenues are used to produce some form of public good, g, which contributes to the agents' utility as illustrated by the previous description of the utility function. a) Write down the two constraints that the agent faces during the two periods. b) Write down the government budget constraint? When answering the following questions make sure you provide all the relevant derivations and steps to obtain full marks. c) What are the optimal consumptions c₁ and c₂? d) What is the optimal savings? e) What is the impact of a change in tax rates on optimal first and second period consumption? f) What is the impact of a change in the interest rate on optimal savings? g) How would your answers in b), c) and d) change if the government now taxes only consumption (sales taxes)? h) Assuming that there are only sales taxes, how would your answers in c) and d) change if G=0.5? i) What type of tax scheme impacts the most the savings behaviour? Show and explain why that is the case. Consider the Two-Period Consumption model covered in class and assume that preferences are given by u(C₁, C₂, g) = 1-o - 0 + B 1-0 C2 1-0 + In (g) The endowment profile of the representative household is e₁ for the first period and is e₂ for the second one. Finally, to transfer resources from period 1 to period 2, the agent has access to savings. The return on savings is r. Assume that a government now imposes linear taxes (i.e, proportional taxes equal to t) on endowments. The resulting tax revenues are used to produce some form of public good, g, which contributes to the agents' utility as illustrated by the previous description of the utility function. a) Write down the two constraints that the agent faces during the two periods. b) Write down the government budget constraint? When answering the following questions make sure you provide all the relevant derivations and steps to obtain full marks. c) What are the optimal consumptions c₁ and c₂? d) What is the optimal savings? e) What is the impact of a change in tax rates on optimal first and second period consumption? f) What is the impact of a change in the interest rate on optimal savings? g) How would your answers in b), c) and d) change if the government now taxes only consumption (sales taxes)? h) Assuming that there are only sales taxes, how would your answers in c) and d) change if G=0.5? i) What type of tax scheme impacts the most the savings behaviour? Show and explain why that is the case.
Expert Answer:
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
Students also viewed these economics questions
-
The UK Treasurer of Suits plc expects to receive a payment for wool exports to a customer in Munich in three months' time. Her marketing department has sold 1,000, "100% wool suits" for a delivered...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
KIRIKOU AND THE SORCERESS (1998) directed by Michel Ocelot tells a West African Folk Tale in animation with music by Senegalese composer, Youssou N'Dour. Describe the human truths revealed through...
-
The potential losses are sorted in the following table. The absolute VaR is 8 Million. What is the relative expected shortfall from the mean? Sorted returns Returns ( Million) -12 -10 -8 -6 -4 -3 -1.5
-
Dickson Furniture Company incurred the following costs in the process of making tables and chairs: Glue ......................................................Paint Supervisor salaries...
-
In Problem find y and the slope of the tangent line to the graph of each equation at the indicated point. (y - 3) 4 - x = y; (-3, 4)
-
What are the ethical obligations in using social media sites in litigation?
-
Refer to the data in Problem 6.36. In exercise Muskoge Company uses a process-costing system. The company manufactures a product that is processed in two departments: Molding and Assembly. In the...
-
Will the virtual teams be able to offer global environmental solutions for organizations and society?Explain
-
The following unadjusted trial balance is for the year ended 30 June 2019: BILLY GOAT LTD Unadjusted Trial Balance as at 30 June 2019 Debit Credit Bank overdraft Vehicle rental expenses Cash at bank...
-
(Figure 1) shows four sides of a 1.5cm x 1.5cm x 1.5cm cube. What is the electric flux through side 1? Express your answer in newton meters squared per coulomb to two significant figures. Submit...
-
OMEGA STEEL must raise cash quickly to meet current financial obligations. The owners want to raise cash using two methods. The first is to take out a loan which it expects to pay off early as it is...
-
Simplify the exponential expression. 30x25 y 18x5y-7
-
What are the underlying factors contributing to employee resistance to organizational change initiatives, and what strategies can leaders employ to effectively manage and facilitate successful change...
-
ABC Office REIT decides to buy an office building in Midtown Manhattan for $150 million. The company has an internal required rate of return of 10%. Rental revenues for the first year of operation...
-
A descriptive example of a project. what the project's objectives (Goals) and deliverables would be a description of what would be done during each of the 5 cycles?
-
What we think elections do The conventional way of thinking about elections is that they are a mechanism of accountability. The logic goes like this: Politicians seek to be elected (or reelected) and...
-
During registration at Tech every quarter, students in the Department of Management must have their courses approved by the departmental advisor. It takes the advisor an average of 4 minutes...
-
Childrens Toys and Gucci Products: In most of our development of consumer theory, we have assumed that tastes are independent of what other people do. This is not true for some goods. For instance,...
-
Natural disasters are local phenomena impacting a city or a part of a state but rarely impacting the whole country, at least if the country is geographically large. To simplify the analysis, suppose...
-
I have two 5-year old girls Ellie and Jenny at home. Suppose I begin the day by giving each girl 10 toy cars and 10 princess toys. I then ask them to plot their indifference curves that contain...
-
Consider the regression model with a single regressor: \(Y_{i}=\beta_{0}+\beta_{1} X_{i}+u_{i}\). Suppose the least squares assumptions in Key Concept 4.3 are satisfied. a. Show that \(X_{i}\) is a...
-
In their study of the effectiveness of cardiac catheterization, McClellan, McNeil, and Newhouse (1994) used as an instrument the difference in distances to cardiac catheterization and regular...
-
In his study of the effect of incarceration on crime rates, suppose Levitt had used the number of lawyers per capita as an instrument. Would this instrument be relevant? Would it be exogenous? Would...
Study smarter with the SolutionInn App