Week 02 Assignment 01 Demand Theory Problem Set 1. Part I: Draw a budget constraint and an...

Question

Week 02 Assignment 01  Demand Theory Problem Set  1. Part I: Draw a budget constraint and an indifference curve for an individual who works in period one and is retired (earns no income) in period two. He consumes some of his income in period 1 and saves the rest of his income for period 2. Place consumption in period 1 on the horizontal axis, and consumption in period 2 on the vertical axis. He has to choose how much to consume now and how much to save for the future. Suppose he earns $1,000,000 in period 1 and receives 10% interest on any income saved for period 2. The interest is taxed at 30%. Draw his budget constraint, labeling the axes, and draw an indifference curve that maximizes his utility. Label consumption in each period, C1 and C2. Label savings in period 1. (Remember that any income that is not consumed is saved for period XXXXXXXXXXPart II: Now consider a change in tax law that is designed to encourage savings. The tax rate on interest income is reduced to 10%. Illustrate the shift in the budget constraint, and draw a new indifference curve that maximizes utility. How has consumption in each period changed? How has savings changed? Describe and illustrate the income and substitution effects. Will one effect necessarily dominate the other? Which effect dominates on your graph? (15 points for both parts)                         XXXXXXXXXX2. Part I: Calculate and shade the consumer surplus for the market for bananas.    Price per lb XXXXXXXXXXBanana Market   $1.50   S        $ XXXXXXXXXXD  1000 Q bananas      Part II: Say the cost of importing bananas to the United States falls by $.25 a pound. Importing bananas is one of the costs of production. Show the resulting shift on your graph. What will happen to price and quantity of bananas sold? What will happen to the consumer surplus? Describe why this happens to consumer surplus intuitively. (15 points for both parts)        
	
Document Preview: Week 02 Assignment 01Demand Theory Problem Set1.	Part I: Draw a budget constraint and an indifference curve for an individual who works in period one and is retired (earns no income) in period two.  He consumes some of his income in period 1 and saves the rest of his income for period 2.  Place consumption in period 1 on the horizontal axis, and consumption in period 2 on the vertical axis.  He has to choose how much to consume now and how much to save for the future.  Suppose he earns $1,000,000 in period 1 and receives 10% interest on any income saved for period 2.  The interest is taxed at 30%.  Draw his budget constraint, labeling the axes, and draw an indifference curve that maximizes his utility.  Label consumption in each period, C1 and C2.  Label savings in period 1.  (Remember that any income that is not consumed is saved for period 2). Part II: Now consider a change in tax law that is designed to encourage savings.  The tax rate on interest income is reduced to 10%.  Illustrate the shift in the budget constraint, and draw a new indifference curve that maximizes utility.  How has consumption in each period changed? How has savings changed? Describe and illustrate the income and substitution effects. Will one effect necessarily dominate the other?  Which effect dominates on your graph? (15 points for both parts)2.	Part I: Calculate and shade the consumer surplus for the market for bananas.Price per lb. XXXXXXXXXXBanana Market  $1.50	  			S     $0.75 				D1000	Q bananasPart II: Say the cost of importing bananas to the United States falls by $.25 a pound.  Importing bananas is one of the costs of production.  Show the resulting shift on your graph.  What will happen to price and quantity of bananas sold?  What will happen to the consumer surplus?  Describe why this happens to consumer surplus intuitively. (15 points for both parts)

David · Accepted Answer

Week 02 Assignment 01 
Demand Theory Problem Set 
1. Part I: Draw a budget constraint and an indifference curve for an individual who works in 
period one and is retired (earns no income) in period two.  He consumes some of his income in 
period 1 and saves the rest of his income for period 2.  Place consumption in period 1 on the 
horizontal axis, and consumption in period 2 on the vertical axis.  He has to choose how much to 
consume now and how much to save for the future.  Suppose he earns $1,000,000 in period 1 and 
receives 10% interest on any income saved for period 2.  The interest is taxed at 30%.  Draw his 
budget constraint, labeling the axes, and draw an indifference curve that maximizes his utility.  
Label consumption in each period, C1 and C2.  Label savings in period 1.  (Remember that any 
income that is not consumed is saved for period 2).  
Answer: 
In a two period model where an individual work only for period 1, rate of interest is ‘r’ and there is 
a tax rate of ‘t’ , the budget constraint is given as; 
C2 = (1+r(1-t))C1 
Current income = $1000000, rate of interest (r) = 0.1 and tax rate on interest (t) = 0.3 
In period 1, the maximum consumption (C1) could be = $1000000 
And period 2, the maximum consumption (C2) could be = (1+r(1-t))*C1 = (1+0.1*(1-0.

Week 02 Assignment 01 Demand Theory Problem Set 1. Part I: Draw a budget constraint and an indifference curve for an individual who works in period one and is retired (earns no income) in period two....

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment