Question 6 (10 points): Suppose government spending is financed through proportional taxes levied on profits. In other words, ? = ? ? such that the representative firm retains (1 ? ?) of the profits ?. Is the competitive equilibrium allocation in this economy a Pareto optimum allocation? Explain. Part 3 The economy has a price-taker representative consumer that lives for two periods. The consumer receives income and chooses consumption goods in both periods to maximize utility. The preferences are the same as described in class. Denote today's income by ? and future income by ??. Similarly, today's consumption is ?, and future consumption is ??. The real interest rate is ?. Question 7: a) (5 points) Write down the consumer's lifetime budget constraint b) (10 points) In a graph with ?? in the y-axis and ? in the x-axis, show the effects of an increase in interest rates assuming that the representative consumer is a lender. Also, assume that the substitution effect is always stronger than the income effect. Question 8 (5 points): Suppose the government collects lump-sum taxes ? today and saves it for the future. In the future, the government spends the interest income ?? = ? ? and refund consumers the amount ?. In a graph with ?? in the y-axis and ? in the x-axis, show the consumer's optimal if there is no government (? = ?? = 0) and how the introduction of the tax changes the consumer's optimal allocation

Transcribed Image Text:

Page < Question 6 (10 points): Suppose government spending is financed through proportional taxes levied on profits. In other words, G = TX such that the representative firm retains (1-T) of the profits . Is the competitive equilibrium allocation in this economy a Pareto optimum allocation? Explain. 3 of 3 Part 3 The economy has a price-taker representative consumer that lives for two periods. The consumer receives income and chooses consumption goods in both periods to maximize utility. The preferences are the same as described in class. Denote today's income by y and future income by y'. Similarly, today's consumption is c, and future consumption is c'. The real interest rate is r. Question 7: a) (5 points) Write down the consumer's lifetime budget constraint b) (10 points) In a graph with c' in the y-axis and c in the x-axis, show the effects of an increase in interest rates assuming that the representative consumer is a lender. Also, assume that the substitution effect is always stronger than the income effect. Question 8 (5 points): Suppose the government collects lump-sum taxes t today and saves it for the future. In the future, the government spends the interest income G' = rxt and refund consumers the amount t. In a graph with c' in the y-axis and c in the x-axis, show the consumer's optimal if there is no government (t = G' = 0) and how the introduction of the tax changes the consumer's optimal allocation MacBook Air 80 Q L Fo F5 F4 F2 F3 # 234 % 205 <6 27 & W E R T Y DII F7 F8 * 8 U B F9 D F10 9 0 P Page < Question 6 (10 points): Suppose government spending is financed through proportional taxes levied on profits. In other words, G = TX such that the representative firm retains (1-T) of the profits . Is the competitive equilibrium allocation in this economy a Pareto optimum allocation? Explain. 3 of 3 Part 3 The economy has a price-taker representative consumer that lives for two periods. The consumer receives income and chooses consumption goods in both periods to maximize utility. The preferences are the same as described in class. Denote today's income by y and future income by y'. Similarly, today's consumption is c, and future consumption is c'. The real interest rate is r. Question 7: a) (5 points) Write down the consumer's lifetime budget constraint b) (10 points) In a graph with c' in the y-axis and c in the x-axis, show the effects of an increase in interest rates assuming that the representative consumer is a lender. Also, assume that the substitution effect is always stronger than the income effect. Question 8 (5 points): Suppose the government collects lump-sum taxes t today and saves it for the future. In the future, the government spends the interest income G' = rxt and refund consumers the amount t. In a graph with c' in the y-axis and c in the x-axis, show the consumer's optimal if there is no government (t = G' = 0) and how the introduction of the tax changes the consumer's optimal allocation MacBook Air 80 Q L Fo F5 F4 F2 F3 # 234 % 205 <6 27 & W E R T Y DII F7 F8 * 8 U B F9 D F10 9 0 P