Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption that
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Suppose a consumer who has a marginal rate of substitution of current consumption for future consumption that is a constant, b.
a. Determine how this consumer’s choice of current consumption, future consumption, and savings depends on the market real interest rate r, and taxes and income in the current and future periods. Show this in diagrams.
b. Now, suppose that current taxes rise and future taxes fall, in such a way that the present value of taxes is unaffected. How does this affect consumption in the current and future periods, and savings for the consumer?
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If the marginal rate of substitution is a constant b then indifference curves are straight lines wi...View the full answer
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