Consider the simple two-period model in chapter 9. Assume that the consumer’s income in the current period is given by y
Posted: Sat May 07, 2022 8:56 pm
Consider the simple two-period model in chapter 9. Assume that the consumer’s income in the current
period is given by y = 100, and income in the future period is y0 = 120. She pays lump-sum taxes t = 20 in
the current period and t0 = 10 in the future period. The real interest rate is 10% or 0.1.
a) Determine the consumer’s lifetime wealth.
b) Suppose that the current and future consumption are perfect complements for the consumer and
that she always wants to have equal consumption in the current and future periods.Draw the consumer’s
indifference curves.
c)Determine what the consumer’s optimal current-period and future-period consumption are, and what
optimal saving is, and show this in a diagram with the consumer’s budget constraint and indifference curves.
Is the consumer a lender or a borrower?
d)Now suppose that instead of y = 100, the consumer’s current-period income increases to y = 140.
Again, determine optimal consumption in the current and future periods and optimal saving, and show this
in a diagram. Is the consumer a lender or borrower?
e)Explain why your answers to part c and d differ.
period is given by y = 100, and income in the future period is y0 = 120. She pays lump-sum taxes t = 20 in
the current period and t0 = 10 in the future period. The real interest rate is 10% or 0.1.
a) Determine the consumer’s lifetime wealth.
b) Suppose that the current and future consumption are perfect complements for the consumer and
that she always wants to have equal consumption in the current and future periods.Draw the consumer’s
indifference curves.
c)Determine what the consumer’s optimal current-period and future-period consumption are, and what
optimal saving is, and show this in a diagram with the consumer’s budget constraint and indifference curves.
Is the consumer a lender or a borrower?
d)Now suppose that instead of y = 100, the consumer’s current-period income increases to y = 140.
Again, determine optimal consumption in the current and future periods and optimal saving, and show this
in a diagram. Is the consumer a lender or borrower?
e)Explain why your answers to part c and d differ.