Using the two-period consumer choice model, explain a person's saving for each period

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Using the two-period consumer choice model, explain a person's saving for each period

(a) if there is no Social Security program and (b) if there is a pay-as-you-go Social Security program. What is the impact of this pay-as-you-go system (1) on the person's savings and (2) on national savings when everyone is similar to this individual?

The Individual:
has a diminishing marginal utility of consumption.
has an income of $40,000 in period 1 and an income of $20,000 in period 2.
has an interest rate for borrowing or lending at 5 percent per period.
intends to consume all income over their lifetime.

a. If there is no Social Security program, optimal consumption in each period leads the person to save $8000 in period 1.

b. If there is a pay-as-you-go Social Security program taking $4,000 from the individual in the first period and paying this amount with a 5 percent return in the second period.

Delivery Time: 3 hours.
Question Category: Economics.
Aliska John
Reputation: 85
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