Economic QUestions:

1.You are born with nothing and you will die with nothing. You will live for 3 periods. Your before

tax labor income is 100 in each period.

Write out the 3 period budget constraint using the income numbers above and notation for consumption and

interest rate.

Now assume lump sum taxes in each period of 10 and an interest rate of 10%. What is the present value of your

life time consumption under this situation.

If you consume an equal amount in every period, how much is C1 C2 and C3?

Utility = Ln(C1) + Ln(C2) + Ln(C3)

59) What is your utility using the C1 C2 & C3 calculated above

Now what if the government only has taxes in period 3 but still spends the same amount each period, plus in

period 3 it needs to pay back the borrowing from periods 1 & 2. What is the present value of your life time

consumption under this situation.

63)What are Taxes in year 3?

65) If you consume your current period income each period, how much is C1 C2 and C3?

Utility = Ln(C1) + Ln(C2) + Ln(C3)

67) What is your utility using the C1 C2 & C3 calculated above

69) What happened to utility compared with previous situation? And why?

71) What should the household have done to maximize utility?

Show tables/diagram if needed. Thanks