PART B: The Lannisters send their regards The Lannisters are in power in King's Landing. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
PART B: The Lannisters send their regards The Lannisters are in power in King's Landing. The people of King's Landing live for two periods. They have some income y = y' = in both periods. They can consume (c) or save/borrow (s) in the first period. They can consume (c) in the second period. For the moment assume that taxes (and government spending) are zero in both periods. In the credit markets, the real interest rate is r. In King's Landing consumers have special intertemporal preferences: they think consumption in the current and future period are perfect complements. Hence, their indifference curves look like an L, with the corner in c c' (see diagram). e. d. What would be the optimal choice of a consumer? Write down the intertemporal budget constraint. Find the optimal choice. Explain your reasoning and illustrate it with a diagram. (Slow and Dumb) The Lannisters need funding for the war with the King in the North. This implies that government spending increases in the first period: G > 0 and G' = 0. The Lannisters are worried about an insurrection, hence they plan to increase taxes in the second period to F, while keeping them equal to zero in the first period. Show with a diagram, and explain, how the consumer's problem changes, and what would be the optimal choice after the future tax increase is announced. (Slow and Dumb) f. After the new taxes are announced, there is an increase of the real interest rate (from r to f). Hence not only future taxes are now positive as in (e), but the interest rate is also higher. Explain how the optimal choice of the consumer changes with respect to (e). Illustrate with a diagram how the income and substitution effect affect the intertemporal allocation of consumption. (Fast and Dumb) PART B: The Lannisters send their regards The Lannisters are in power in King's Landing. The people of King's Landing live for two periods. They have some income y = y' = in both periods. They can consume (c) or save/borrow (s) in the first period. They can consume (c) in the second period. For the moment assume that taxes (and government spending) are zero in both periods. In the credit markets, the real interest rate is r. In King's Landing consumers have special intertemporal preferences: they think consumption in the current and future period are perfect complements. Hence, their indifference curves look like an L, with the corner in c c' (see diagram). e. d. What would be the optimal choice of a consumer? Write down the intertemporal budget constraint. Find the optimal choice. Explain your reasoning and illustrate it with a diagram. (Slow and Dumb) The Lannisters need funding for the war with the King in the North. This implies that government spending increases in the first period: G > 0 and G' = 0. The Lannisters are worried about an insurrection, hence they plan to increase taxes in the second period to F, while keeping them equal to zero in the first period. Show with a diagram, and explain, how the consumer's problem changes, and what would be the optimal choice after the future tax increase is announced. (Slow and Dumb) f. After the new taxes are announced, there is an increase of the real interest rate (from r to f). Hence not only future taxes are now positive as in (e), but the interest rate is also higher. Explain how the optimal choice of the consumer changes with respect to (e). Illustrate with a diagram how the income and substitution effect affect the intertemporal allocation of consumption. (Fast and Dumb)
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
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
In our development of consumer theory, we made a big point about the fact that neoclassical economics does not put much stock in the idea of cardinally measuring utility (in terms of units of...
-
Both of the following questions are essentially the same. Does the difference in wording seem as though it could affect the way that people respond? Are you in favor of the "Defense of Marriage...
-
'Although the straight-line method of depreciation is the simplest to apply, it may not always be the most appropriate'. Explain and discuss.
-
You are an analyst with Perception Partners and have been asked to make pricing recommendations regarding the acquisition of Rose Garden Apartments. This project was built five years ago and contains...
-
A heat pump works on the principle of the (a) First law of thermodynamics (b) Second law of thermodynamics (c) Zeroth law of thermodynamics (d) Third law of thermodynamics.
-
This problem continues the Daniels Consulting situation from Problem PI2-45 of Chapter 12. Daniels decides to raise additional capital for a planned business expansion by issuing 8,000 additional $2...
-
Prepare the closing entries and perform the Post-closing trial balance . Trial adjusted balance Account Balance Accounts receivable 119,000 Prepaid insurance 25,000 Materials (supplies) 3,850 Cash...
-
Lewis Company reports the following fixed budget and actual results for May. Prepare a flexible budget performance report showing variances between budgeted and actual results. (Indicate the effect...
-
(a) Given a message signal m(t) = 3cos(2m x 10t) + 5cos(4x10t) + 10cos(12x10t) is to be transmitted over a PCM system. (i) Find the number of bit (M) required if the quantization level (AV) is less...
-
What are the two components of a theory of business cycles?
-
Why does the Federal Reserve work hard to establish its credibility? What benefits might the public gain if the Federal Reserve has a great deal of credibility?
-
What is the Phillips curve? Does the Phillips curve relationship hold for U.S. data? Explain.
-
Why is the real exchange rate important in macroeconomic analysis? How does it affect net exports? Explain and give an example.
-
Two changes are observed in a labor market: firms are quicker to hire and fire workers, and the mismatch across industrial sectors increases. Will these raise the natural unemployment rate? If yes,...
-
Prepare a statement of activities and a statement of financial position for Nonprofit Trade Association for the fiscal year ended June 30, 2006. On July 1, 2005, the beginning of a fiscal year, the...
-
Bonus shares can be issued out of revenue reserves. True/False?
-
Consider two brothers, Eddy and Larry, who, despite growing up in the same household, have grown quite different personalities. A: Eddy is known to his friends as steady Eddy he likes predictability...
-
The introduction to intertemporal budgeting in this chapter can be applied to thinking about the pricing of basic financial assets. The assets we will consider will differ in terms of when they pay...
-
Exploring the Difference between Willingness to Pay and Willingness to Accept: Suppose you and I are identical in every way same exogenous income, same tastes over pizza and other goods. The only...
-
With reference to Exercise 10.42, verify that the mean of the observed distribution is 1.6 , corresponding to \(40 \%\) of the cars requiring repairs. Then look up the probabilities for \(n=5\) and...
-
The following is the distribution of the hourly number of trucks arriving at a company's warehouse: Find the mean of this distribution, and using it (rounded to one decimal place) as the parameter...
-
Among 100 purification filters used in an experiment, 46 had a service life of less than 20 hours, 19 had a service life of 20 or more but less than 40 hours, 17 had a service life of 40 or more but...
Study smarter with the SolutionInn App