Question: Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the

Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the two periods. In particular, preferences are such thatc2= 0.5c1. Income in the two periods is equal toy1= 500 andy2= 1000, and income taxes are proportional1= 50% and2= 50%. The real interest rate isr= 0%.

(a) What is the present value of lifetime resources (PVLR)? What is the highest feasible consumption in the current period? What is the highest feasible consumption in the future period?

(b) Find the optimal consumption in each period (c1,c2) and the amount of saving/borrowing. Comment on your findings.

(c) What happens to the consumption and saving choices if the real interest rate isr= 100% and there are no taxes (1=2= 0%)? Comment on your findings.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!

Suppose a persons life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the two periods. In particular, preferences are such that c2...

Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer does not desire to perfectly smooth consumption over the two periods. In particular, preferences are such...

Question 2 - Consumption and Savings (25 Marks) Suppose a person's life is divided into two main blocks, periods 1 and 2. The consumer desires to perfectly smooth consumption over the two periods, so...

Suppose a person's life is divided into two main blocks, periods I and 2, The consumer desires to perfectly smooth consumption over the two periods, setting e =ca - c'. Income in the two periods is...

Mind helping in these Human lCapital Model: Fieinterpretthe human capital growth model as follows: Suppose there are two groups of people in a country, the lowskilled and the highskilled, where the...

Help me get tye correct answe5.... EXERCISE Question 1 (Three-period Model - Appendix to Ch. 4) A consumer lives three periods - the learning period, the working period, and the retirement period....

Identify and discuss the benefits of using different types of instructional feedback. Note : You must cite the reference Augmented Feedback How Giving Feedback Influences Learning KEY TERMS absolute...

D Resume-- Fatema Sanzida Hoque X Per Coca Cola-2022-Annual-Report[1 X PDE BSMM 8110 -group project for s x PRE Accounts_Final_Draft1.pdf * + X @ File |...

Dr. Al Cahall wanted to determine experimentally the relative ease of removal of a hydrogen atom from a tertiary, a secondary, and a primary carbon by a chlorine radical. He allowed 2-methylbutane to...

Certain new machinery, when placed in service, is estimated to cost $180,000. It is expected to reduce net annual operating expenses by $36,000 per year for 10 years and to have a $30,000 MV at the...

SIPC provides protection for clients against broker - dealer insolvency in amounts up to:

Entries for Costs in Job Order Costing Royal Technology Company uses job order costing. The following data summarize the operations related to production for March: a. Materials purchased on account,...

6. That segment of a competitive firms marginal-cost curve that lies above its average-variable-cost curve constitutes the shortrun supply curve for the firm. Explain using a graph and words. LO10.5

LO11.4 Show how long-run equilibrium in pure competition produces an efficient allocation of resources.

7. last word If a firms current revenues are less than its current variable costs, when should it shut down? If the firm decides to shut down, should we expect that decision to be final? Explain...