The government and the opposition in the country want to raise Consumption by giving a transfer immediately of 100 to one (and only one) specific category of people.

The government wants to help university students: since they have no income today, they will spend immediately a large part of them. The opposition instead prefer to help poor retired workers, since they claim students are already spending today. Use the two-periods model seen in class to decide which party is right.

a. Without any transfer payment, show the budget constraints of (A) a student whose income is 0 in period 1 and 1000 in period 2 and (B) a poor retired worker that has income of 100 in period 1 and 2, but also starts with 200 of wealth. The real interest rate is 5%.

b. Suppose both agents have the following utility function: U(c1, c2) = log(c1)+1/1.05 log(c2) Find the optimal allocations for A and B, without any transfer payments.

c. Now, show to the two parties that which of the two agents (A, B) will consume immediately the largest share of that additional 100 that they would like to transfer in period 1. Is there any difference?