Consider an individual with utility function

Reference no: EM13690285

Consider an individual with utility function U=(C1)3/4(C2)1/4 who is alive for two periods and has an income stream(m1, m2). At some point the government decides to intervene in the economy: in the first period the individual has to pay a fraction 0<t<1 of its income as taxes, and in the second period he receives a transfer equal to q as pension.

(a) What is the value of q that makes the present value of income the same before and after the government intervention?

(b) Use the value of q obtained in the previous question and the effect of the government intervention on the savings of the individual. Differentiate the case when the individual is initially a saver and the case when the individual is initially a borrower.

Reference no: EM13690285

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