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Part A) Let's model out a two-period world (today and tomorrow). Assume we have two individuals right now, Heckle and Jeckle. Each of them earns
Part A) Let's model out a two-period world (today and tomorrow). Assume we have two individuals right now, Heckle and Jeckle. Each of them earns labor income of $100 in period one (today). Each of them is "retired" in period two (i.e. they do not work in formal labor market). The interest rate in the economy is 100%. There is only one thing you can purchase in this world, and that is books. Assume that book prices are $1 per book, and remain the same over time. Depict the intertemporal budget constraint for each of these individuals. (As they are identical, you only need to show one). Describe the amount they can consume in each period. Part B) Suppose we then institute a 30% income tax on all labor market earnings. Depict what happens to their budget constraints and explain what happens to their consumption of books in each period (i.e. describe why it "hurts" to pay taxes). Once again, you only need to draw one picture as what happens to both Heckle and Jeckle is identical
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