Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interestrate of (1 – t)r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent.Consider a consumer who is a saver. Answer parts a), b), c) and d) below.Round your numerical answer in part a) to 3 decimal places.a). The relative price of consumption today to consumption tomorrow for this saver isb). Suppose the tax rate increases. How does the saver's relative price of consumption today change?A. Consumption today has the same price relative to consumption tomorrow.B. Consumption today becomes relatively more expensiveC. Consumption today becomes relatively cheaperc). As a result, the substitution effect shows thatA. Consumption today increases, while consumption tomorrow decreasesB. Consumption today remains unchanged, which consumption tomorrow increasesC. Consumption today declines, while consumption tomorrow increases

When analysing utility maximisation situations, economists identify two different kinds of impacts…

Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest ate of (1-t) r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent. Consider a consumer who is a saver. Answer parts a), b), c) and d) below. Round your numerical answer in part a) to 3 decimal places. ). The relative price of consumption today to consumption tomorrow for this saver is ). Suppose the tax rate increases. How does the saver's relative price of consumption today change? OA. Consumption today has the same price relative to consumption tomorrow. OB. Consumption today becomes relatively more expensive OC. Consumption today becomes relatively cheaper ). As a result, the substitution effect shows that OA. Consumption today increases, while consumption tomorrow decreases OB. Consumption today remains unchanged, which consumption tomorrow increases OC. Consumption today declines, while consumption tomorrow increases

Consider a two-period model in which the goverment introduces a tax on interest earnings. This means that borrowers pay a net interest rate of r, however lenders (savers) receive a net interest ate of (1-t) r on their savings, where t is the tax rate withheld by the government and is a multiplication sign. Let r = 8 percent and t = 28 percent. Consider a consumer who is a saver. Answer parts a), b), c) and d) below. Round your numerical answer in part a) to 3 decimal places. ). The relative price of consumption today to consumption tomorrow for this saver is ). Suppose the tax rate increases. How does the saver's relative price of consumption today change? OA. Consumption today has the same price relative to consumption tomorrow. OB. Consumption today becomes relatively more expensive OC. Consumption today becomes relatively cheaper ). As a result, the substitution effect shows that OA. Consumption today increases, while consumption tomorrow decreases OB. Consumption today remains unchanged, which consumption tomorrow increases OC. Consumption today declines, while consumption tomorrow increases

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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7.
Consider an economy that lasts for two periods. A household receives nominal labour income Y1 = 100 in the first period and Y2 = 110 in the second period. The price level in the first period is P = 10 and in the second period it's P, = 11. The nominal interest rate i is 15%. Household chooses real consumption c1 and c2 (relative to price level in the first period) to maximise utility U(c1, c2) that exhibits the decreasing marginal rate of substitution property. 1. Calculate the inflation rate 7 and the real interest rate r. 2. Find the real consumption values for which the household neither saves, nor borrows. For all questions below assume that this is the optimal choice for the housheold. 3. Draw and describe analytically the set of feasible consumption choices. What is the marginal rate of substitution at the optimal choice? 4. Now assume that due to increase in risk premia, banks introduce a spread on interest rates, borrowers now pay ry = r + 1% and lenders get ri = r – 1% on…
U(C1, C2) = c₁0.8 20.4 where c₁ is the quantity of current consumption goods and c₂ is the quantity of future consumption goods. Consider a consumer whose income is y₁ = 100 in the current period and y₂ = 140 in the future period. The consumer pays lump-sum taxes t₁ and t₂ == = 20 in the current period 10 in the future period. The real interest rate is r = 0.1, or 10%, per period. (a) Write down the consumer's budget constraint for each period and derive the consumer's lifetime budget constraint. What is the value of the consumer's lifetime wealth? [Note: Lifetime wealth is the present value of the consumer's lifetime disposable income] (b) Draw the lifetime budget line on the (C1, C2) plane with c₁ on the horizontal axis and C₂ on the vertical axis. Include the values of the intercepts and the endowment point in your graph. What is the slope of the budget line? (c) What are the two conditions that the consumer's optimal choice of (C1, C2) must satisfy? Find the consumer's optimal…
Consider the household model that you have seen in class but now assume that the goal of the household is to consume twice as much in period 2 as in period 1. She earns $100 in the first period and $150 in the second period. The interest rate is 5%. What is her optimal saving in the first period? Note: Type in your answer approximated to two decimal points, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard will automatically delete it and you should not do anything about it.
In a two-period model, suppose that a consumer's utility function is: U(C₁, C₂) = log(c₁) + log(c₂) where C₁, C₂ are the consumption of a good (orange) in the two periods. Let the endowment real income in the two periods be 2, 1 respectively. The real interest rate is unknown and is to be determined in the equilibrium. Assume that all consumers are identical. ** Part a Solve the demand for C₁ given any real interest rate r*. ** Part b Find the level of the real interest rate such that the market clears in Period 1.
Let's incorporate the labor-leisure trade-off and capital income taxes in the two-period model. Let c₁, c₂ be consumption in two periods, I the number of hours worked, Te Te the proportional taxes on consumption in 2 periods, s the saving rate, w the wage rate, b pension in the 2nd period, and 7, the tax on savings (capital income tax). The household's maximization problem in this case is: given by max₁,02,8,1-1 log(c₁) + log (1-1)+5log (c₂) such that (1+T₁₁) C₁+s=(1-7)wl and (1+T₂)C₂ = [1+r(1-T)]s+b, where measures how the household values leisure vis-a-vis consumption.
Labor Market Y = α (5N – 0.0025N2), where α = 2; N = labor The supply of labor, NS isNS = 55 + 10(1-t)w where t- tax rate = 0.5, w = real wage rate Good Market The desired consumption, Cd is Cd = 300 + 0.8(Y – T) – 200rWhere Y = income, T = taxes, r = real interest rate T= 20 + 0.5YG= 50Desired investment, Id:Id = 258.5 – 250r Money Market Demand for money, Md/P: Md/P = 0.5Y – 250(r + πe), where πe = 0.02 (expected inflation) Money supply = Ms = 9150 a)Find the equilibrium w, Y and N.b)Find the IS-curve and the equilibrium r, C and I.c)Find the LM-curve and the equilibrium P.d)If G increased to 72.5, find the equilibrium w, P, N, r, C and I.e)Discuss the differences between the equilibrium values in d) with a), b) and c). What is your conclusion with regard to the effectiveness of fiscal policy in this model?
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Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as max{log c1 + log c2} c1 + a1 = y1 − τ1 + (1 + r)a0 c2 = y2 − τ2 + (1 + r)a1 where y1 and y2 denote income levels in period 1 and period 2, τ1 and τ2 are taxes in the two periods, and a0 and a1 denote the assets of the households in each period. a0 is exogenously given. Assume the interest rate r = 0, and the government can borrow or save at the same interest rate so that its present-value budget constraint is given by g1 + g2 = τ1 + τ2 where g1 and g2 are exogenous government expenditures…
1/2 of the population is unemployed with $500 in income; the other 1/2 are employed and earn $50,000 each individual has the utility function: U=4x(1/2) where x=individual's income Proposal 1) government taxes everyone with income at a flat rate of 10%. From the tax revenue, the government will refund the same amount to each person; regardless of their income Proposal 2) government taxes everyone at a flat rate of 10%. It will refund the same amount to each person according to the percentage of taxes paid. Question: compare the proposals under the utilitarian and Rawlsian social welfare functions. How do these proposals rank under each social welfare function? (all calculations can be done on a per-capita basis).
Scenario 21-3 Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works an earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings. Refer to Scenario 21-3. If the interest rate on savings increases, a. Scott will always increase his savings in the work period. b. Scott will increase his savings in the work period if the income effect is greater than the substitution effect for him. c. Scott will decrease his savings in the work period if the income effect is greater than the substitution effect for him. Od. Scott will decrease his savings in the work period if the substitution effect is greater than the income effect for him. C
Assume you can work as many hours you wish at £12 per hour (net of tax). If you do not work, you have no income. You have no ability to borrow or lend, so your consumption, c, is simply equal to your income. Derive and plot the feasible set, between daily values of consumption c, and “leisure”, l. Label the values at the intercepts (the points where the feasible frontier cuts the two axes).