question archive Hannah lives for two periods and has a life-time utility √ c1 + 0
Hannah lives for two periods and has a life-time utility √ c1 + 0
Subject:EconomicsPrice: Bought3
Hannah lives for two periods and has a life-time utility √ c1 + 0.8
√ c2. Hannah's income are as follows: y1 = 60, 000 and y2 = 25, 000. The real interest rate r = 7%.
1. (3 points) (Baseline case) How much will Hannah consume in each period? How much does she save?
2. (3 points) Suppose that Hannah cares about her future more; the subjective discount factor increases to 0.9. The increase of the subjective discount factor is the result of technology advances in medicine; Hannah could stay healthy and live longer. How much will Hannah consume in each period? How much does she save? Compared with part (1) what do you find?
3. (4 points) For the rest of the questions Hannah's subjective discount factor stays at 0.8. Suppose that the government levies a flat rate capital income tax with a tax rate of 40%. Let τ k denote the tax rate on capital income. Hannah's budget constraint becomes the following: c1 + c2 1 + (1 − τ k )r = y1 + y2 1 + (1 − τ k )r How much will Hannah consume in each period? How much does she save? Compared with part (1), what do you find? How much revenue can the government collect?
4. (4 points) Suppose that the government levies a flat rate consumption tax instead of a capital income tax. The tax rate on consumption, denoted by τ c , is 2%. Hannah's budget constraint under a consumption tax is the following: (1 + τ c ) · c1 + (1 + τ c ) · c2 1 + r = y1 + y2 1 + r How much will Hannah consume in each period? How much does she save? Compared with part (1), what do you find? How much revenue can the government collect in this case? Compare the results in part (4) with the results in part (3), what do you find?
