Author Question: For many consumption activities skiing, for example the activity becomes more enjoyable as the ... (Read 94 times)

mcmcdaniel · **on:** Jun 30, 2018

For many consumption activities skiing, for example the activity becomes more enjoyable as the consumer becomes more experienced.

Assuming that training consumption is inexpensive relative to proficient consumption, do such activities make it more or less likely that a borrowing constraint will be binding?

Question 2

As a part of the tax cut package signed into law on December 17, 2010, the government reduced the employee portion of the payroll tax from 4 to 2 for 2011. According to the permanent-income hypothesis, households that smooth consumption will

A) use all of the extra income generated by this tax reduction for consumption during 2011.
B) use a large portion of the extra income generated by this tax reduction for consumption during 2011.
C) use most of the extra income generated by this tax reduction as saving during 2011.
D) split the income evenly between consumption and saving during 2011, since the tax cut will expire after one year and consumption is smoothed.

juiceman1987 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Such activities encourage a shift of consumption into the future. The decrease in current consumption makes a binding borrowing constraint less likely.

Answer to Question 2

C