Draw budget constraint and an indifference curve

Assignment Help Business Economics

Reference no: EM131245096

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).

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?

Reference no: EM131245096

Questions Cloud

How would explain his inaccurate memory of this experience : Two weeks ago Jim described a vivid, flashbulb memory from his childhood of the day he found out that his parents won the lottery. He remembered exactly where he was sitting in his house and what board game he and his siblings were playing when th..

Firm graphs for perfectly competitive industry : Using both market and firm graphs for a perfectly competitive industry, show the effect of an increase in consumers’ income taxes. Assume the representative firm and market begin in long run equilibrium. Illustrate the short run effect on price, outp..

Explain the meaning of the following proverb : Explain the meaning of the following proverb: "The first 10 percent of the work is accomplished with 90 percent of the budget. The second 90 percent of the work is accomplished with the remaining 10 percent of the budget."

How would you balance politics with influencing employees : How would you balance politics with influencing employees? Summarize how you would implement such changes while maintaining the overall vision of the department.

Draw budget constraint and an indifference curve : 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 i..

Why did the authors use this t test : Why did the authors use this t test? Do you think it's the most appropriate choice? Why or why not? Did the authors display the data?

Prevent the previous problems from recurring : Brainstorming at United Central Bank (Part III): President Keith evaluated all of the data and decided to give the brainstorming committee one more chance. What changes can Joseph Keith implement in order to prevent the previous problems from recu..

Comparative advantage in the production of trousers : According to the U.S. Census Bureau, in July 2006 the United States expected aircraft worth $1 billion to China and imported aircraft worth only $19,000 from China. During the same month, however, the United States imported $83 million worth of men's..

What are the arguments for and against brainstorming : What are the arguments for and against brainstorming? If you were Joseph Keith, would you vote for or against the continuation of the brainstorming sessions?

User Account

All Pages