Question

2. A consumer is making lifecycle consumption plans for two periods (this year and next year). The consumer's current real income after taxes is $100,000. She knows that her real income after taxes will be $121,000 in next year. She can borrow and lend freely at an annual real interest rate of 10%. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). A) If the consumer wants to consume the same amount of consumption this year and next year, then how much should she consume each period? B) If the consumer wants to consume next year twice as much as the consumption of this year, then how much should she consume each period? Does she borrow or save this year? (hint: if this year consumption is x, the next year consumption is 2x.]

Answer 1

A) The customer would consume 110,500.

B) As a result, consumption in period 1 is around 73667.

147,334

Step-by-step explanation:

A) Because the consumer wishes to consume the same amount during both periods:

Total earnings over two periods = 100,000+121,000=221,000

Period 1 consumption = Period 2 consumption = x

X + x=221000

2x=221000

x= 221000/2= 110,500

As a result, the customer would consume 110,500 during each quarter. Because the consumer's income is lower in the first period, he or she will borrow in that period.

B) Consumers want to spend twice as much next year as they did this year:

Total earnings over two periods = 221,000

Period 1 consumption = x

Period 2 consumption = 2x

Total consumption throughout both time periods = x+2x= 221000

3x= 221000

x=221000/3=73667 approx.

Period 2 consumption = 2x = 2*73667 = 147,334