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A consumer is assumed to live for two periods: 1 and 2 . Her endowed incomes in period 1 and 2 are y1=260 and y2=300. The lump sum income taxes in the two periods are t1=60 and t2=50. The interest rate, r=0.1 or 10%. The consumer is credit constrained and cannot borrow any amount. The consumer does not leave any bequest and her preferences over life- time consumptions are captured by the utility function: U(C1,C2)=Min(C1,C2), where "Min" denotes "minimum value of". Determine the optimal levels of current and future consumption. How will your answer change if y1 =360? Show and explain all calculations. (Hint: Think about the shape of the indifference curve and the amount of the lifetime wealth.).

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A consumer is assumed to live for two periods: 1 and 2 . Her endowed incomes in period 1 and 2 are y1=260 and y2=300. The lump sum income taxes in the two periods are t1=60 and t2=50. The interest rate, r=0.1 or 10%. The consumer is credit constrained and cannot borrow any amount. The consumer does not leave any bequest and her preferences over life- time consumptions are captured by the utility function: U(C1,C2)=Min(C1,C2), where "Min" denotes "minimum value of". Determine the optimal levels of current and future consumption. How will your answer change if y1 =360? Show and explain all calculations. (Hint: Think about the shape of the indifference curve and the amount of the lifetime wealth.)

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A consumer is assumed to live for two periods 1 and 2 Her.pdf

  • 1. A consumer is assumed to live for two periods: 1 and 2 . Her endowed incomes in period 1 and 2 are y1=260 and y2=300. The lump sum income taxes in the two periods are t1=60 and t2=50. The interest rate, r=0.1 or 10%. The consumer is credit constrained and cannot borrow any amount. The consumer does not leave any bequest and her preferences over life- time consumptions are captured by the utility function: U(C1,C2)=Min(C1,C2), where "Min" denotes "minimum value of". Determine the optimal levels of current and future consumption. How will your answer change if y1 =360? Show and explain all calculations. (Hint: Think about the shape of the indifference curve and the amount of the lifetime wealth.)