Graph two-period budget constraint-consumption-find slope


To be specific, suppose we have a two-period model. An individual earns labor income Y0 =$100k at time zero, and earns no labor income at time 1. The individual may consume or save that income. Savings grow at rate r=.03.  For every dollar of consumption, the individual pays the tax rate τ=.30 to the government.

a. Graph the two-period budget constraint for consumption. What is the slope? Is this tax distortionary?

b. The government modifies the consumption tax somewhat so that the first $20k of consumption in each period is tax free. Now graph the budget constraint.

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Microeconomics: Graph two-period budget constraint-consumption-find slope
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