Consider the model of limited commitment that we learned in Chapter 10. In particular, the loan from the bank must be supported by a collateral, whose value is given by pH. The consumer’s lifetime wealth is then we=y−t+y′−t′+pH1+r where y and y′ are the current and future income, t and t′ are the current and future taxes, and r is the real interest rate. The consumer chooses consumption in the current period c and future period c′ to maximize the lifetime utility given by u(c, c′) = ln c + ln c′. Answer the following questions. Write down the lifetime budget constraint of this consumer. Derive the constraint of loan size which guarantees pay back. In particular, write down the condition that restricts the size of current consumption c. Formulate the consumer’s problem.

Consider the model of limited commitment that we learned in Chapter 10. In particular, the loan from the bank must be supported by a collateral, whose value is given by pH. The consumer’s lifetime wealth is then we=y−t+y′−t′+pH1+r where y and y′ are the current and future income, t and t′ are the current and future taxes, and r is the real interest rate. The consumer chooses consumption in the current period c and future period c′ to maximize the lifetime utility given by u(c, c′) = ln c + ln c′. Answer the following questions. Write down the lifetime budget constraint of this consumer. Derive the constraint of loan size which guarantees pay back. In particular, write down the condition that restricts the size of current consumption c. Formulate the consumer’s problem.

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 1QFR

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