1 Consumption function with credit constrained households and lump-sum taxes (50%). Consider an economy with two groups of consumers, the less well off, who have no initial wealth and accordingly are credit constrained (they cannot borrow or lend to smooth consumption) and the "potentially" rich who have an initial endowment of wealth in period 1 of and who can borrow or lend to smooth consumption. For simplicity, assume that each has the same level of labour income in period 1 ( ). The two different consumption functions for period 1 are