In the economy of Valmonte, there are two types of citizens - Optimistic people and Pessimistic People, Economists estim

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In The Economy Of Valmonte There Are Two Types Of Citizens Optimistic People And Pessimistic People Economists Estim 1 (105.81 KiB) Viewed 43 times

In the economy of Valmonte, there are two types of citizens - Optimistic people and Pessimistic People, Economists estimate that each person will live for two periods. Each type of citizens has the following utility functions: Optimistic People: V. = 2c + c' Pessimistic People: Up= c + 20' where c is consumption in period 1 and c' is consumption in period 2. Current interest rate is 0.05 (i.e. 5%) per period. Economists have estimated that the real income for individuals is 100 in each period. Valmonte's tax rate is 20% per period. a) What are the lifetime budget constraints for the Optimistic people and Pessimistic People of Valmonte? (2 points) b) What are the optimal consumption decisions of c and c' for the Optimistic people and Pessimistic People of Valmonte? Who are borrowers and who are lenders? (2 points)