Question

Mr. Free has $100 income this year and zero income next year. The market interest rate is 10 percent per year. If Mr. Free consumes $30 this year and invests the rest in the market, what will be his consumption next year?

a. $50
b. $55
c. $77
d. $100

Answer 1

After consuming $30 this year, Mr. Free invests the remaining $70 at a market interest rate of 10%. His investment will grow to $77 next year, enabling him to consume that amount.

Step-by-step explanation:

If Mr. Free consumes $30 this year and invests the rest at a market interest rate of 10 percent, we need to calculate his consumption for next year. Mr. Free's remaining amount after consumption this year is $100 - $30 = $70. When this $70 is invested at 10 percent interest rate, the investment will grow to $70 * (1 + 0.10) by next year. Therefore, his consumption for next year can be calculated as:

$70 * (1 + 0.10) = $70 * 1.10 = $77.

So, Mr. Free will be able to consume $77 next year.