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quiz6micro - the price in the working years(p 1 to 1 and...

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Quiz #6 Spring 2010 Question 1 Suppose the government passes a bill that will increase the future income tax. You can think of this as a lump-sum tax on the period-2 endowment. If an individual is a borrower in the first period, is it possible that he or she will switch to being a saver? Explain your answer and show your result on a graph. Question 2 Tom is a senior in college and is trying to decide how to allocate his income throughout his lifetime. He is considering two stages of life his working years, and his retirement. Normalize
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Unformatted text preview: the price in the working years (p 1 ) to 1, and suppose inflation between the two periods is 3%. Also, assume the interest rate (r) is 5%. His utility from consumption in each period can be represented by the function ° ( ± 1 , ± 2 ) = ln( ± 1 ) + ² ln( ± 2 ) , where β = .95 is the rate at which he discounts future utility. Tom expects to earn $100 in his working years, and he expects only a social security payment of $20 in his retirement years. How much should Tom save in order to maximize his lifetime utility?...
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