Brandon lives for two periods (period 0 and 1). In what follows, a subscript denotes period.

1. Explain why s1, his savings in period 1, is not positive. Suppose that Brandon's preferences are represented by u(c0, c1) = log(c0) + 1/3 log(c1), and his income is (y0, y1) = (16, 20), of which the government takes away (t0, t1) = (6, 0). Due to his reckless eating habit, no one wants to lend to him. As a result, in addition to his usual intertemporal budget constraint, he also faces credit constraint s0 0. The interest rate is given by r = 1. 2. Write his utility maximization problem.

3. With c0 on the horizontal axis and c1 on the vertical axis, shade in his budget constraint.

4. Compute the optimal bundle and s0 when he did not face the credit constraint.

5. How much is the smallest tax cut in period 0 that would make his credit constraint nonbinding? Explain.

6. Does the result invalidate the Ricardian equivalence theorem? Explain.