Why Indifference Curves Cannot Cross - Essay Example

So, if the employee considers that the tax refund is permanent (i.e. will not be adjusted upwards at some point in the future) he will consider he has a greater disposable current income (represented by an outward shift in the budget constraint from ω to ω’). In the other case, the employee will use the tax refund for savings. The answer depends on the perception of the income taxes of employees. So, if the employee considers that the tax refund is permanent (i.e. will not be adjusted upwards at some point in the future) he will consider he has a greater disposable current income (represented by an outward shift in the budget constraint from ω to ω’).

In the other case, the employee will use the tax refund for savings (a shift from ω to ω’’)c)It is good to get a tax refund up to some point because if you consider a future increase in taxes for the next year, the effect of the refund will be offset by future possible higher liabilities.Optimal current consumption and savings:c+ c’/1.05=255.24 => c= 130.89 => s= 200-40-130.89= 29.11 => consumer is a lenderOptimal future consumption and savings:c+ c’/1.05=255.24 => c= 130.

89 => s= 150-50-130.89= -30.89 => consumer is a borrowerc)w=200-20+ (150-71)/1.05= 255.24Optimal current consumption and savings:c+ c’/1.05=255.24 => c= 130.89 => s= 200-20-130.89= 49.11 => consumer is a lenderOptimal future consumption and savings:c+ c’/1.05=255.24 => c= 130.89 => s= 150-71-130.89= -51.89 => consumer is a borrower