Demand Theory and Market Analysis: Budget Constraints, Consumer Surplus, and the Impact of Price Changes

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Demand Theory and Market Analysis: Budget Constraints, Consumer Surplus, and the Impact of Price Changes Week 02 Assignment 01 Demand Theory Problem Set 1. Part I: Draw a budget constraint and an indifference curve for an individual who works in period one and is retired (earns no income) in period two. He consumes some of his income in period 1 and saves the rest of his income for period 2. Place consumption in period 1 on the horizontal axis, and consumption in period 2 on the vertical axis. He has to choose how much to consume now and how much to save for the future. Suppose he earns $1,000,000 in period 1 and receives 10% interest on any income saved for period 2. The interest is taxed at 30%. Draw his budget constraint, labeling the axes, and draw an indifference curve that maximizes his utility. Label consumption in each period, C1 and C2. Label savings in period 1. (Remember that any income that is not consumed is saved for period 2).
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