Question

Consumption and Saving - End of Chapter Problem Nicolas Cage, an award winning and prolific actor, once had a net worth of about $150 million dollars (he earned $40 million in 2009 alone!). By 2011, he was having to sell off much of his amassed collection of homes, cars, and novelties to pay off remaining debts and had a net worth of about $25 million. Ever wonder why he's in a new action movie on Netflix every other month? a. Move the point on the graph to represent the consumption decisions of Nicolas Cage in 2009 after he earned $40 million Marginal Benefit b. If Nicolas Cage instead used the Rational Rule of Consumers and practiced consumption smoothing, where should his consumption have been in 2009? Targinal Benefit Marginal Benefit Consumption

Answer 1

If Nicolas Cage followed the Rational Rule of Consumers and practiced consumption smoothing, his consumption in 2009 should have been lower than $40 million, taking into account his expected future income.

Step-by-step explanation:

In 2009, Nicolas Cage earned $40 million. If he followed the Rational Rule of Consumers and practiced consumption smoothing, his consumption should have been spread out over time rather than spent all at once. This means that his consumption decision in 2009 should have been based on his expected future income and not solely on his current income.

For example, if Nicolas Cage expected to earn a similar income in the next few years, he could have chosen to consume a smaller amount in 2009 and save more for the future. This would have allowed him to maintain his lifestyle for a longer period of time.

In summary, if Nicolas Cage used consumption smoothing, his consumption in 2009 would have been lower than $40 million, taking into account his expected future income and the principle of saving for the future.

Answer 2

a) It is to be noted that the graph that reflects Nichola's consumption pattern after 2019 is the second graph which depicts that the more he spent, the less the marginal benefit he got from those expenses.

b) If Nicholas applied Rational Rule of consumer and practiced consumption smoothing in 2019, his consumption in 2019 would likely have been more moderate and aligned with his level of income and overall financial stability. See the third graph.

The benefit of applying the Rational Rule of Consumers and practicing consumption smoothing lies in achieving greater financial stability and long-term satisfaction.

By avoiding abrupt changes in spending and aligning consumption with income levels, individuals can better manage their finances, reduce the risk of financial stress, and maintain a more sustainable lifestyle.

This approach promotes responsible financial behavior and enhances overall well-being.

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