Consider the two period intertemporal consumption model that we discussed in cla

Question

Consider the two period intertemporal consumption model that we discussed in class. Suppose that Mike earns $10,000 from working in period 1. In period 2, he retires and earns nothing. What is saved in period 1 earns interest of 10%. Suppose now that the government taxes interest income at the rate of 20%.

( a) Write down and draw Mike’s intertemporal budget constraint as a function of first-period consumption and second-period consumption

PLEASE EXPLAIN IT IN A SIMPLE WAY THAT'S EASY TO UNDERSTAND

Explanation / Answer

Mike earns $10.000 in period 1

Mike earns 0 in period 2

Savings in period 1 earns 10% interest rate.

Interest now is taxed at 20%

For 10,000 dollar mike used to earn 1000 PA interest

Now government has decided to tax interest of 20% on interest tax is 200 he will be left with 800.

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