Question: what is the effect on the household optimal consumption decision? Consider the two-period model. The consumer's preferences over current and future consumption (c and c)
what is the effect on the household optimal consumption decision?

Consider the two-period model. The consumer's preferences over current and future consumption (c and c) is given by In(c)+b In(c') where d Inx/d x=1/x, and b is a constant. Households receive after tax income in the first and second period equal to y and y', where the present discounted value of income is given by we. Households can save, s, for the second period and receive interest rate r. The government implements a consumption tax, t, in the first period and t'in the second period where t'st, and raises the cost of consumption from c to (1+t)c. What is the effect on the households optimal consumption decision? Could be either. Depends on the income and substitution effects Chooses less first period consumption relative to second period consumption Chooses more first period consumption relative to second period consumption Chooses the same amount of first period consumption relative to second period consumption
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
