Cookie Monster 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.

([03 pts]) Suppose that Cookie Monster'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 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.

1. Write his utility maximization problem. ([03 pts])
2. With c0 on the horizontal axis and c1 on the vertical axis, shade in his budget constraint. ([04 pts])
3. Compute the optimal bundle and s0 when he did not face the credit constraint. ([08 pts])
4. How much is the smallest tax cut in period 0 that would make his credit constraint non- binding? Explain. ([08 pts]) '
5. Does the result invalidate the Ricardian equivalence theorem? Explain.