Find out the budget constraint, Microeconomics

1. Suppose that there is a credit market imperfection because of asymmetric information. In the economy, there are N consumers. A fraction b of consumers consists of lenders, who each receive an endowment of y units of the consumption good in the current period and 0 units in the future period. A fraction of borrowers are good borrowers, who each receive an endowment of 0 units in the current period and y units in the future period. Finally, the left consumers are bad borrowers, who receive 0 units of endowment in both periods. Banks cannot distinguish between good and bad borrowers. The government sets G and G' as government spending, and each consumer is asked to pay a lump-sum tax of t in the current period and t' in the future period. The government also cannot distinguish between good and bad borrowers, but as with banks can observe endowments. The lending rate is r.

a. Write down the government's budget constraint.

b. Find out the budget constraints of good borrowers, bad borrowers, and lenders respectively.

c. Suppose that the government decrease t and increase t' in such a way that the government budget constraint holds. Does this have any effect on each consumer's decisions about how much to consume in each period and how much to save? Explain.

d. Does Ricardian equivalence hold in the economy? Explain why or why not?

Posted Date: 3/2/2013 4:08:31 AM | Location : United States







Related Discussions:- Find out the budget constraint, Assignment Help, Ask Question on Find out the budget constraint, Get Answer, Expert's Help, Find out the budget constraint Discussions

Write discussion on Find out the budget constraint
Your posts are moderated
Related Questions
The following represents the potential outcomes of your first salary negotiation after graduation: Assuming this is a sequential move game with the employer moving first, indicate

Uses of national income statistics: - It helps to organize economic data and activities. - It helps to classify economic activities into various segments or sectors. - It he

A major component of the costs of many large firms is the cost associated with ordering and holding inventory. If the yearly demand for the good is D and the size of each order pla


Illustrate and discuss the impliction of various market structures(competitive and non-competitive)


Why do demand curves generally slope downward?  The demand curve slopes downward because in general, the higher the price of the good, the fewer people will need to buy it.

Deficiency of iodine Inadequate iodine also leads to dry skin, loss of hair, exhaustion and sluggish reflexes. For the developing fetus, infant and young children, iodine deficienc

group trend including ionic and atomic radii,electron affinity,electronegativity,charge density and ionization potential

A firm is currently operating where the MC of the last unit produced = $84, and the MR of this unit = $70. What would you advise this firm to do?