Donald lives for two periods. He inherited two flats in New York. The first flat is H1 square meters. the second flat is H2 square meters. The price per square meter of the two flats is the same: p1 = 192 = 1. Flats can only be sold in the second period, no matter who owns them. He would like to get a loan from Deutsche Bank to finance his upcoming political party. Deutsche Bank only lends money if customers post some assets as collateral. Donald's income in the current and the future period is y = y' = 1. Donald does not pay taxes (t = t' = 0). The interest rate in the credit market is r. Donald sees current and future consumption as perfect substitutes. His indifference curves are therefore straight lines corresponding to the equation u = ac + c', where u is the level of happiness. Assume a > 1 + r. a) Derive the intertemporal budget constraint for Donald, and the collateral constraint that he faces. Draw it in a diagram with current consumption on the horizontal axis, and future consumption on the vertical axis. Explain. b) What would be the optimal choice for Donald? Illustrate it using a diagram and explain your reasoning. c) The IRS, which is the agency in charge of collecting taxes, discovers that Donald owes some unpaid taxes to the government. Donald has to pay t = 0.5 in the first period, and t' = 0.5 in the second period. How does the intertemporal budget constraint, the collateral constraint and the optimal choice for Donald change? d) g) h) Donald tries to strike a deal with the IRS: in the first period, Donald will give the government his second flat in New York (the one with size H2) instead of paying the taxes due in the current and future period. How would this deal change the intertemporal budget constraint and the collateral constraint for Donald with respect to question 0? How would his optimal choice of current and future consumption change? Calculate the minimum size H2 that the second flat must have for the IRS to accept this deal. Explain the intuition. Calculate a condition that H2 must satisfy so that Donald is better off by striking the deal than by paying taxes. Explain the intuition. [Hintz you need to establish if Donald can reach a higher indifference curve with the deal, and remember that the indifference curve is given by u 2 ac + c'] Based on your answers to questions e and f, will there be a deal? Explain why or why not. How would your answer to question 9 change if the price of the second flat were still p2 = 1, but the price of the first flat increased to p1 > 1