not sure if you need a utility function but if so use: U(c, c\' ) = log c + ? lo

Question

not sure if you need a utility function but if so use:

U(c, c' ) = log c + ? log c'

2. Again, in the consumption savings model, assume that lump-sum taxes are zero. But suppose the government taxes on interest earnings. Le. borrowers face interest rate r suppose the government taxes on interest earnings. 1.e. borrowers face interest rate r while the lenders face an interet rate (1 - t)r. (a) What is the effect of introducing the tax rate on the consumer's budget constraint? (b) What is the effect of the tax on a consumer who was initially a lender and is still a Draw the constraint for borrower and lender. lender after the tax? Explain in terms of income and substitution effect.

Explanation / Answer

1.

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