Question
Assume a consumer has current-period income y , future-period income y' , current and future taxes t and t' , respectively, and faces a market
Assume a consumer has current-period income y, future-period income y', current and future taxes t and t', respectively, and faces a market real interest rate of r per period. The consumers initial current and future optimal consumption can be indicated as c and c respectively, where U(c, c) = b ln c + (1-b) ln c, and s>0. Now suppose the following change occurs: this consumer is faced with a credit market imperfection in that he/she/they cannot borrow at all. Assuming value of b is less than 1, illustrate in a diagram the effect of this change on the consumers optimization decision. (Clearly indicate all possible changes in lifetime wealth, endowment, current optimal consumption, and future optimal consumption).
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