What is the impact on the consumer borrowing or saving

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Reference no: EM133440585

Question: Consider a consumer that lives only two periods and leaves no money behind. This consumer likes consumption (composite good) in both periods. The utility function is:
U = c 0 * c 1 , MU0 = c 1 , MU1 = c 0
In period 0, the consumer's income is M 0 = 20,000 and in period 1, the consumer's income is M 1 = 5,000. The interest rate at which the consumer can borrow and lend money is 10%.
a) What is the consumer's optimal consumption bundle borrowing or saving decision without a public pension?
b) Now suppose that the government offers a public pension (financed by a pay-as-you-go system) that charges $3,000 in payroll taxes in period 0 and promises a pension of $3,300 in period What is the impact on the consumer's borrowing or saving decision?
c) Now suppose that the government asked for a payroll tax of $8,000 in period 0 and promised a pension of $8,800 in period 1. What is the impact on this consumer's borrowing and saving decision now?

Reference no: EM133440585

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