Question

3. A consumer lives for two periods. His income in period 1 is Y, and his income in period 2 is Y.,. The consumer is free to lend and borrow at zero interest rate (r=0 and R=1+r=1). Y, = Y, = 10. (a) What is the price of consumption in period 1 in terms of consumption in period 2? (How many units of period 2 consumption must the consumer give up to get an additional unit of consumption in period 1)? (b) What is the maximum consumption that the consumer can have in the first period? (C) Draw the budget constraint. In your graph have the endowment point, the slope and the intersections with the horizontal axis and with the vertical axis.

Answer 1

Q3 Period : Y = 10 Period 2: Y 2 = 10 La-2 Jake.. Periode consumption as sumescine - then puice of periodi consumptionis - the amount of period a consum must be given hup to get extra unit of - period. consumption Budget constrant is a (1+A) с+,m, liн) кс, 2 __huice of consumption wi pevice I was lite) huice of consumption is feliradi z isz Since [uid, two period price ratio in I suffesting that one unit of period 2 Consumption must be given up to get Lan additional unik o penied in consismption b) from equation 0 litora t63.106.170) +10.: 76_42= 20 6 6 20 then consumen borrows loc.cond period o ne and maximum consumption in period i 20, 2201

170 endowment point troilo) slopez - TFM) 2-T ot 10 20 T d) Assuming lumpsum tax in period i 425 - Neco budget constranit is given by: (1tu) C + 6 2 (m. - IC itu) to M²0 , qq m, z 10 M2 2 10 T125 Citla = ? 5 (144) + 10 5 710215 lumpsum tox not only reduces period consumption but reduces savings in period! that can be used for period a consumption. Budget cornbílanai- eshitta inwards._slope Mermaims__ same > af tax was value added then budget- line would swivel amous exaclowment -point (10, Lo) 5 10 15 2