Reference no: EM13774313

Explain what the lock-in effect is for capital gains that are taxed on realization. How can the effect lead to inefficient allocation of capital? b. Explain what a Roth I.R.A. is and show how its availability affects a competitive consumer's budget set for consumption expenditure during the consumer's working years (plotted on the horizontal axis) and consumption expenditure during the consumer's retirement years (plotted on the vertical axis). Assume that the consumer will earn a 5% annual real pretax rate of return on all saving and will save each dollar saved for 42 years. What additional information (if any) is needed in order to compute the slope of the budget line at different points of the frontier of the consumer's budget set? Suppose that you had all the necessary information. Show how you could use it to write a formula for the slope of the budget line at each point in the frontier of the budget set when the I.R.A. is available. Define any notation you introduce and explain why each formula you wrote is correct. c. Use indifference curves to show how being allowed to deposit savings in a Roth I.R.A. could cause a competitive consumer to save more or could cause the consumer to save less than she would save if denied access to the Roth I.R.A. d. A consumer has decided to set aside $3000 of her income in the current year and save it for retirement. She is considering either putting all $3000 in a traditional IRA or else putting all $3000 in a Roth IRA. What factors should determine her choice? Does it depend mainly on her preferences or more on other factors? Explain fully, being as specific as possible. To simplify the problem, you may assume that she knows her current income and the marginal income tax rate she will have in the current year and in the first year of her retirement when she will withdraw the $3000 from the IRA along with all the accumulated interest, reinvested dividends, and capital gains.