835 Ask Copilot 3 of 5 11. III. The government imposes a 20% tax on labor income. Solve for the new optimal levels of C1, C2, and S. Explain any differences between the new level of savings and the level in part (a), paying attention to any income and substitution effects. (5 marks) Instead of the labor income tax, the government imposes a 20% tax on interest income. Solve for the new optimal levels of C1, C2, and S. (Hint: What is the new after tax interest rate?) Explain any differences between the new level of savings and the level in a, paying attention to any income and substitution effects. c) What is meant by the term optimal taxation? (5 marks) (5 marks) [Total = 25 marks] QUESTIONS THREE QUESTIONS TWO a) Tax a levied by Government to finance the provision of public goods and services. Discuss three others reasons why taxes should be levied (5 marks) b) Consider a model in which individuals live for two periods and have utility functions of the form U = In(C1) + In(C2). They earn income of $100 in the first period and save S to finance consumption in the second period. The interest rate, r, is 10%. 1. Set up the individual's lifetime utility maximization problem. Solve for the optimal C1, C2, and S. (Hint: Rewrite C2 in terms of income, C1, and r.) Draw a graph showing the opportunity set. (5 marks)
835 Ask Copilot 3 of 5 11. III. The government imposes a 20% tax on labor income. Solve for the new optimal levels of C1, C2, and S. Explain any differences between the new level of savings and the level in part (a), paying attention to any income and substitution effects. (5 marks) Instead of the labor income tax, the government imposes a 20% tax on interest income. Solve for the new optimal levels of C1, C2, and S. (Hint: What is the new after tax interest rate?) Explain any differences between the new level of savings and the level in a, paying attention to any income and substitution effects. c) What is meant by the term optimal taxation? (5 marks) (5 marks) [Total = 25 marks] QUESTIONS THREE QUESTIONS TWO a) Tax a levied by Government to finance the provision of public goods and services. Discuss three others reasons why taxes should be levied (5 marks) b) Consider a model in which individuals live for two periods and have utility functions of the form U = In(C1) + In(C2). They earn income of $100 in the first period and save S to finance consumption in the second period. The interest rate, r, is 10%. 1. Set up the individual's lifetime utility maximization problem. Solve for the optimal C1, C2, and S. (Hint: Rewrite C2 in terms of income, C1, and r.) Draw a graph showing the opportunity set. (5 marks)
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.13P
Related questions
Question
![835
Ask Copilot
3
of 5
11.
III.
The government imposes a 20% tax on labor income. Solve for the new optimal
levels of C1, C2, and S. Explain any differences between the new level of
savings and the level in part (a), paying attention to any income and substitution
effects.
(5 marks)
Instead of the labor income tax, the government imposes a 20% tax on
interest income. Solve for the new optimal levels of C1, C2, and S. (Hint:
What is the new after tax interest rate?) Explain any differences between the
new level of savings and the level in a, paying attention to any income and
substitution effects.
c) What is meant by the term optimal taxation?
(5 marks)
(5 marks)
[Total = 25 marks]
QUESTIONS THREE](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd221770e-bf15-4028-bd6b-18893797f624%2F13c5ca0d-be16-40b0-a9d6-272024b36410%2Fv66y9n9_processed.jpeg&w=3840&q=75)
Transcribed Image Text:835
Ask Copilot
3
of 5
11.
III.
The government imposes a 20% tax on labor income. Solve for the new optimal
levels of C1, C2, and S. Explain any differences between the new level of
savings and the level in part (a), paying attention to any income and substitution
effects.
(5 marks)
Instead of the labor income tax, the government imposes a 20% tax on
interest income. Solve for the new optimal levels of C1, C2, and S. (Hint:
What is the new after tax interest rate?) Explain any differences between the
new level of savings and the level in a, paying attention to any income and
substitution effects.
c) What is meant by the term optimal taxation?
(5 marks)
(5 marks)
[Total = 25 marks]
QUESTIONS THREE
Transcribed Image Text:QUESTIONS TWO
a) Tax a levied by Government to finance the provision of public goods and services.
Discuss three others reasons why taxes should be levied
(5 marks)
b) Consider a model in which individuals live for two periods and have utility functions
of the form U = In(C1) + In(C2). They earn income of $100 in the first period and
save S to finance consumption in the second period. The interest rate, r, is 10%.
1.
Set up the individual's lifetime utility maximization problem. Solve for the
optimal C1, C2, and S. (Hint: Rewrite C2 in terms of income, C1, and r.)
Draw a graph showing the opportunity set.
(5 marks)
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