Suppose that Dave expects to work for 40 years. in his first 20 years he expects to earn $600,000, while in his second 20 years he expects to earn $900,000. suppose that the interest rate earned on saving is 50% and the interest rate paid on loans is 50%.

a. Show dave's income when young and old (M0, M1) on the diagram below.

b. Draw dave budget line on the diagram below. Assume that he can save and borrow at i=50%.

c. Draw an indifference curve consistent with dave taking out 100,000 mortgage loan when he is under 40 years old. Identify his consumption choice as C0* and C1* on the diagram below.

d. Show how a comprehensive flat personal income tax at t=33.3% alters Dave's budget line if Mortgage interest is not deductible from taxable income.

e. Show how a comprehensive flat personal income tax at t=33.3% alters Dave's budget line if mortgage interest is deductible from taxable income.

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