The economy has 100 identical consumers. Each consumer has income of y = 100 in the current period, and y’ = 325 in the future period.
The economy has 100 identical consumers. Each consumer has income of y = 100 in the current period, and y’ = 325 in the future period. Each consumer pays lump-sum taxes t = 10 in the current period and t’ = 10 in the future period. Each consumer also has a house with value pH = 105. Housing is illiquid and can only be sold in the future period. The real interest rate is 0.05 per period. A consumer’s preference over current and future consumption is represented as u(c, c’) = log(c) + log(c’).
(a) Suppose there is perfect contract commitment. Determine a consumer’s optimal current and future consumption and optimal saving.
(b) In equilibrium, what has to be the life-time present value of government expenditure G + G’/(1 + r)?
Save your time - order a paper!
Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines
Order Paper Now(c) Suppose there is limited commitment in the credit market, and consumers face the following collateral constraint −(1 + r)s ≤ pH. Plot a consumer’s budget constraint, label the intersection with x- and y-axis. Determine the optimal current and future consumption. Does the consumer have a higher or lower welfare than case (b)? Explain briefly.
(d) Under the limited commitment in (c), how can the government change its tax policy to restore a consumer’s welfare back to (b) without changing the government expenditures? (You need to write down the exact numbers for current and future tax.)
Note that MRCc,c’ = MUc/MUc’ = (1/c) / (1/c’) . I really need detail solution for this question to comprehend it.