Economics!!

1 Life Cycle Consumption and Taxes (50 points) Assume we are in an economy of three period households that are born with $4000 in assets, leave no bequests, and behave under the life-cycle model of consumption. The economy is made up of 20 age 1 households, 18 age 2 households, and 15 age 3 households every period. These households all earn wages of $3000 in the first period and $8500 in the second period. They are retired and earn no wages in the third period. The equilibrium interest rate is given to be 50 percent. 1. Calculate the lifetime consumption and savings decisions for this house- hold. (12 points) 2. Is this household a borrower or a saver in period 1? Why? (4 points) The creation of the Permitment Income Hypothesis was of we observed difference ween shortrun havior, Explan Suppose government institutes a 25 percent income tax (tax on both wage and interest). 3. Calculate the new consumption and savings decisions for this household after the tax. (10 points) the diver 4. How does this tax influence the household's utility from private con- sumption and total utility? Explain. (6 points)