1. (20 points) An employee has to choose between two contracts. Assume that the net real interest rate on saving and borrowing equals r > 0. Under contract A, she has gross incomes y and y' in the current and future periods, respectively, and has to pay taxes t and f' in the current and future periods, respectively. Under contract B, an employer offers the employee an option to increase income next year by r . (1 +r) units and reduce income this year by r units. Taxes are the same under both contracts. (a) (10 points) Write down current and future budget constraints and the lifetime budget constraint under the two contracts. Which contract would the employee choose and why? (Hint: you should compare lifetime wealth under the two con- tracts.) (b) (10 points) Assume that preferences over current and future consumption are U(c,d) = -}(c-c)2 - }B(d - c), where c is the bliss consumption level and B = 1+7' Find consumption in the current and future periods and saving under the two contracts. Compare consumption levels and saving under the two contracts