Question

2 Life Cycle Consumption and Taxes (39 points) Assume we are in an economy of three period households that are born with $1500 in assets, leave no bequests, and behave under the life-cycle model of consumption. The economy is made up of 20 age 1 households, 18 age 2 households, and 15 age 3 households every period. These households all earn wages of $10000 in the first period and $20000 in the second period. They are retired and earn no wages in the third period. The equilibrium interest rate is given to be 100 percent. #of eds 1. Calculate the lifetime consumption and savings decisions for this house- hold.(10 points) 2000 4 5 6 7 8 hird period, the second perids all eam

2) Is this household a borrower or a saver in period 1? Why?

3) Suppose government institues a 25% wage tax

Calculate the new consumption and savings decisions for this household after the tax.

4) Given the demographics of this economy, how much tax revenue was generated by the tax?

Answer 1

C C2 Ca (V) + Gtv (rty)2 OY C3()2(Y, - G) +Y2- Ca) () TE100 the aomounmer Rnows thar he is bat t wituour ss uming in pd. au pd.T , CO=2 tu witu be a awer in priod I beiauoe t He reapon shated aboue (r 100) 2 Wilu 251. 1ax )(05-)+(-152-C2)(H) Gr 3(7E00)t 2(150)60,000) +0B 20x O. 25 5xO. 25%W2 5o000 t 75, DOO 1) Govt. neveue /25, 000