Question

A consumer is making saving plans for this year and next. She knows that her real income after taxes will be $50,000 in both years. Any part of her income saved this year will earn a real interest rate of 10% between this year and next year. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). There is no uncertainty about the future.The consumer wants to save an amount this year that will allow her to (1) make college tuition payments next year equal to $12,600 in real terms; (2) enjoy exactly the same amount of consumption this year and next year, not counting tuition payments as part of next year's consumption; and (3) have neither asserts nor debts at the end of next year.

a. How much should the consumer save this year? How much should she consume? How are the amounts that the consumer should save and consume affected by each of the following changes (taken one at a time, with other variables held at their original values)?

Answer 1

To calculate how much the consumer should save this year, we need to first determine how much would need to be saved in order to have $12,600 for college tuition payments next year. Given a real interest rate of 10%, the consumer should save $11,454.54 this year and consume $38,545.46.

Step-by-step explanation:

To calculate how much the consumer should save this year, we need to first determine how much would need to be saved in order to have $12,600 for college tuition payments next year. Given a real interest rate of 10%, we can use the formula:

Amount to save = Future value / (1 + Real interest rate)

Plugging in the values, we get:

Amount to save = $12,600 / (1 + 0.1) = $11,454.54

Therefore, the consumer should save $11,454.54 this year.

To calculate the amount the consumer should consume, we can subtract the saved amount from the income:

Consumption = Income - Amount saved = $50,000 - $11,454.54 = $38,545.46

So, the consumer should save $11,454.54 this year and consume $38,545.46.