Optimal consumption choice, Macroeconomics

In our 2 period consumption savings model (with no leisure, u(c1, c2), suppose interest income in period 2 is taxed at the rates, where 0 < t2 < 1. The individual has zero initial wealth A0 = 0. Exogenous real income in period 1 and 2 are y1 = 1 and y2 = 0.

a) Write down period 1 and period 2 budget constraints for the consumer.

b) Using each period budget constraint, derive the consumer's Lifetime Budget Constraint (LBC).

c) Graphically show the optimality condition for the consumer's decision. This is, in the c2 vs c1 space plot the budget constraint line, the indifference curve and the optimal consumption choice.

d) What is the effect on savings if the interest income tax is increased? Show graphically.

e) Let u(c1, c2) = lnc1 + lnc2. Solve explicitly for the optimal consumption in both periods. Discuss briefly the effect of the interest income tax on each period consumption.

Posted Date: 2/4/2014 12:18:26 AM | Location : United States

Related Discussions:- Optimal consumption choice, Assignment Help, Ask Question on Optimal consumption choice, Get Answer, Expert's Help, Optimal consumption choice Discussions

Write discussion on Optimal consumption choice
Your posts are moderated
Related Questions
For this question you will use the dataset "march01.dat", which includes wages (column 1), age (column 2), a dummy variable indicating females (column 3), and years of education (c

Q1. The poorest countries in the world have a per capita income of about $600 today. We can reasonably assume that it is nearly impossible to live on an income below half this leve

Production Alternatives Type of production A B C D E Automobiles 0 2 4 6 8 Forklifts 30 27 21 12 0 If the economy is at point C, what is the (opportunity) cost of 2 more automobile

You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -3,

Question 1: Discuss the alternative theories of the demand for money and their relevance in specifying a demand for money function for a small island developing economy like

Kermit is considering purchasing a new computer system. The purchase price is $106,430. Kermit will borrow one-fourth of the purchase price from a bank at 10 percent per year compo

Suppose that quantity demand falls by 30% as a result of a 5% increase in price. What would be the price elasticity of demand for this good?

Q. Explain about Phillips curve ? The Phillips curveĀ  According to traditional Phillips curve, there is a negative and stable relationship between unemployment andwage in