Question
Consider the situation of an individual whose preferences are: ln(ct)+ln(ct+1). The discount factor is equal to 44 + 100 and then divided by 200. Labor
Consider the situation of an individual whose preferences are: ln(ct)+ln(ct+1). The discount factor is equal to 44 + 100 and then divided by 200. Labor income the 1st period is 4844, and your labor income the second period is 1120. The interest rate is 4 + 10 in percentage.
(a) Write down the maximization problem for this individual.
(b) Solve the maximization problem and find current consumption, future consumption and savings.
(c) Consider a policy that imposes a tax on consumption equal to 44 in percent (same tax in both periods). Compute how the invidual's behavior changes.
(d) Consider now a different policy that imposes a tax on capital income equal to 4 + 10 in percent. Compute how the invidual's behavior changes.
(e) Compare both policies in terms of individuals' welfare and fiscal revenues.
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