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Part III. Consider Donny who makes a decision on saving and consumption over two different periods - present and future. Donny's present income is w 10 M, and his future income will be also W 10 M as well. Donny can save some of his present income, and also borrow some of his future income in advance to increase his present consumption. The interest rate is 10%. Without any tax, Donny consumes W9Min the present period. Draw a diagram showing Donny's inter-temporal choice of saving and consumption and answer to the following questions How much does Donny save in the present period? 5. 6. How much will be Donny's consumption in the future? Now suppose that the government imposes 20% tax on the interest income, while all interest paid out by the consumer is partly subsidized by the government at the same rate. (This is equivalent to the full deduction of interest payment.) There is no tax on labor earnings. After the tax, Donny raised present consumption to W 10.5 M by borrowing W 0.5 M from a bank. How much will be Donny's consumption in the future? 7. Explain the income effect due to the tax 8. Explain the substitution effect due to the tax 9. 10. If the government eliminates the subsidy (or deduction) program, how would Donny's decision change? (Note: The interest tax is still effective) Part II. Suppose that Chilhong's total time endowment is 24 hours and the given wage rate is W 10,000 per hour. Draw Chilhong's budget line in a diagram with leisure and labor supply on the horizontal axis and income per day on the vertical axis. Say Chilhong chooses to earn W100,000 per day. 1