A consumer's income in the current period is y = 100, and income in the future period is y' = 120. He or she pays lump-sum taxes t = 20 in the current period and t' = 10 in the future period. The real interest rate is 0.1, or 10%, per period. a) Determine the consumer's lifetime wealth. b) Suppose that current and future consumptions are perfect complements for the consumer and that he or 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 consumptions 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?

A consumer's income in the current period is y = 100, and income in the future period is y' = 120. He or she pays lump-sum taxes t = 20 in the current period and t' = 10 in the future period. The real interest rate is 0.1, or 10%, per period. a) Determine the consumer's lifetime wealth. b) Suppose that current and future consumptions are perfect complements for the consumer and that he or 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 consumptions 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?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.2P

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A consumer's current income (y) is 200 and the future income ( t.') is 240. A current lump sum tax (t) of 10 is paid and the tax in the next period (t') is 15. The real interest rate is 20% for each period. Please assume that current and future consumption are complements. and the consumer always prefers to have one unit of current consumption and two units of consumption in the future.Calculate the consumer's lifetime wealth.Calculate the optimal current and future consumption and the optimal current and future savings. Is the consumer a lender or a borrower? How does he she. as a lender or a borrower. affect the future consumption?
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