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Consider a two-period model of intertemporal choice. In each period i=1,2, the consumer has income mi>0, and makes a consumption choice xi0, with pi>0 being
Consider a two-period model of intertemporal choice. In each period i=1,2, the consumer has income mi>0, and makes a consumption choice xi0, with pi>0 being the price of the consumption good. The consumer can save her period 1 income or borrow against her period 2 income at interest rate r>0. (a) Suppose that the government is worried that the consumer is not adequately planning for her old age and imposes a forced savings scheme: the government imposes a floor 0
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