Consider a two period intertemporal choice problem. Anne earns an income of R400,000 in period 1. The
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Consider a two period intertemporal choice problem. Anne earns an income of R400,000 in period 1. The interest rate available is 5% and there is a 40% tax on saving. A retirement tax subsidy is introduced. Individuals can contribute to a retirement fund in period 1. After accounting for the retirement tax subsidy, the share of tax that remains is 50% smaller.
- Draw a graph with consumption in period 1 on the x-axis and consumption in period 2 on the y-axis to illustrate Anne's optimal choice of consumption and saving without the retirement subsidy. Then indicate the effect of the subsidy on the intertemporal budget constraint.
- After the introduction of the retirement tax subsidy, we find that Anne's savings decrease. Use a graph to explain whether the income effect or the substitution effect dominates.
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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