2 Consumption Question 1.[25pt] Consider an economy where the representative consumer has the follow- ing utility function: U 3/5 2/5 = '5: (1+1 with the budget constraints for the two periods the consumer is alive of: a) b) d) e) ll) Cid-81:34 Ct+1= Y1+1+(1+ Tris: With an income of 5 in the rst period and 22 in the second period, is the consumer likely to he a borrower or saver? Explain. Assume the same income as in part a) and a real interest rate of 10%. What would be the optimal consumption choice for period t and t + 1, as well as saving in period t? Depict the optimal choice graphically in a graph of c! and (',+1. Add the intertemporal budget constraint, initial endowments and the relevant indifference curve. Label all intercepts and points of interest. How does optimal consumption in the rst period c: react to changes in Y},Y,,+l and T}? For full points show the magnitude of the effect. Now assume the consumer is (strictly) borrowing constraint. What is the \"optimal\" choice now? Explain and show graphically. This borrowing constraint holds also for all following parts of the question! Assume the government provides a subsidy B of 20 to the young in period t. \"What must be the tax T in period t+1 such that the government can interteniporally balance its budget? Given the new budget constraints Ct+5r=YI+BJ Ci+l = Yt+l + (1 +7'tlSt ' TH] and the relationship derived in part c), derive the optimal choice and show your results graphically. Is this government policy welfare improving? Does Ricardian equivalence hold? Ex- plain