Exercise A (Two-Period Model: Importance of Considering Present Value)

Suppose that you are employed. Your current income is e > 0 and future income is e > 0. Your employer

comes to you and asks the following change in your income schedule: reducing future income by x units but

increasing current income by x units. The interest rate is given as r > 0 and there is no tax in this economy.

1. Say you are the employer and you would like to lower current income by x units because you do not have enough money. What would be the minimum changes in the future income that the employee would accept the change?