An individual's current income is $50,000 the person expects next period (future) income to be $50,000 as shown in the diagram to the right. 1.) Using the line drawing tool, draw the budget constraint for a real interest rate of 0%. Label this line 'Budget- 2.) Using the line drawing tool, draw the budget constraint for an increase in the interest rate above 0%. Label this line 'Budget₁'. Carefully follow the instructions above, and only draw the required objects. 160- 150- 140- 130- 120- 110- 100- 90- 80- 70- Future Consumption (000)

An individual's current income is $50,000 the person expects next period (future) income to be $50,000 as shown in the diagram to the right. 1.) Using the line drawing tool, draw the budget constraint for a real interest rate of 0%. Label this line 'Budget- 2.) Using the line drawing tool, draw the budget constraint for an increase in the interest rate above 0%. Label this line 'Budget₁'. Carefully follow the instructions above, and only draw the required objects. 160- 150- 140- 130- 120- 110- 100- 90- 80- 70- Future Consumption (000)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

1. Complete the following table and answer the questions below: Units consumed Total utility Marginal utility 1 10 10 2 8. 25 4 30 5 6. 34 2. Columns 1 through 4 in the table below show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the prices of A, B, C, and D are P18, 6, 4, and 24, respectively, and that Ricardo has an income of 106. Column 1 Column 2 Column 3 Column 4 Column 5 Unit Unit Unit Unit No. of MU MU MU MU P saved MU of A of B of C of D || || || || | 1 72 1 24 1 15 1 36 1 2 54 2 15 12 2 30 2 3 45 3 12 8 3 24 3 36 4 18 2 27 5 7 5 13 5 1 18 6. 7 6. 1/2 7 15 7 7 3.5 7 4 7 1/4 8 12 8. 1 8 2 8. 1/8 a. What quantities of A, B, C, and D will Ricardo purchase in maximizing his utility? b. How many pesos will Ricardo choose to save?
Help me
3rian earns income equal to $82,000 in the first period, but his income will drop to $19,170 in the second period. a Sketch his intertemporal budget constraint, ansuming a 6.5% interest rate. Add an indifference curve that assumes he optimally chooses to save $40,000 in the first period. Be sure to CLEARLY graph your answer, with labeln on the axes and any other important points. Also show work for any calculations done. b. Show the offect of a 50% tax on interest income, assuming the substitution and income effects cancel each other out. Again, be sure to clearly graph your answer and show work for any calculations done.
An individual lives for 5 years - 4 years of work followed by 1 year of retirement. He earns $25,000 during each year of work but $0 during retirement. The interest rate is 5% Assume that the individual wants his consumption to be the same in each of the 5 years. a. What utility function would justify this choice of consumption pattern? b. Write out the intertemporal budget constraint in present value form.c. What level of consumption does he choose?d. What is the value of his assets at the beginning of retirement?
7 Consider a model in which an individual lives only two periods. This person has diminishing marginal utility of consumption and receives an income of $20,000 in period 1 and an income of $5,000 in period 2. The private interest rate is 10 percent per period, and this person can borrow or lend money at this rate. Also assume that this person intends to consume all of his income over his lifetime. a. Give a hypothetical numerical example of what a person’s optimal consumption would be over these two periods. In answering this question, what assumptions did you make?
Brian earns income equal to $82,000 in the first period, but his income will drop to $19,170 in the second period. a. Sketch his intertemporal budget constraint, assuming a 6.5% interest rate. Add an indifference curve that assumes he optimally chooses to save $40,000 in the first period. Be sure to CLEARLY graph your answer, with labels on the axes and any other important points. Also show work for any calculations done. b. Show the effect of a 50% tax on interest income, assuming the substitution and income effects cancel each other out. Again, be sure to clearly graph your answer and show work for any calculations done.
1. Which of the following represents the household's lifetime budget constraint? a. q +a₂ = 1 b. c₂ = 1/₂+(1+m₂)a₂ c₁+c₂/(1+₂) = 1 +32/(1+12) d. U = Inc + Blnc₂ 2. Which of the following are choice variables of the household? a. Yl b. y2 C₁ d. 12 3. If the household can borrow and lend, an increase in y₁ causes which of the following to increase? a. C1 C2 c. 92 d. all of the above 4. For a household that can borrow and lend, the horizontal intercept of a sketch of the lifetime budget constraint is a. Y1 by₁+ 1 y2 1+12 c. Y2 d. (1+12)y1+y2 5. Suppose a household can borrow and lend in a perfectly competitive credit market. Assume B=0.2 and r2 = 0.10. The value for the optimal choice of a2 when y₁ = 10 and y2 = 0 is a. 1.67 b. 0.00 c. -5.91 (d)-7.58
1. Mia receives $100 of income this period and $100 next period. At an interest rate of 10 percent, he consumes all her current income in each period. He has a diminishing marginal rate of time preference between consumption next period and consumption this period. The interest rate rises to 20 percent. • Draw Mia's budget constraint, indifference curve, and label optimal bundle before and after the change in interest rate. o Will Mia save some of her income this period? Explain your answer in two sentences.
Jason spends his entire budget on coffee and doughnuts. You have the following data on his choices: Table 1: Jason's consumption choice and budget Price / cup of coffee Price / doughnut cups purchased doughnuts purchased Income February 2 1 4 22 March 5/2 3/4 10 8 31 April 3 1/2 8 14 31 Assume Jason 's preferences are monotone, the same over the three months, and that he has no way to save or borrow across periods. Are Jason's choices consistent with utility maximization?
Which of the following statements is correct? a. The demand for future goods is derived from consumers’ utility maximization problems over current and future consumption goods. b. It is the present value of future consumption goods that enters into the budget constraint of a consumer’s utility maximization problem over current and future consumption goods. c. The solution to a consumer’s utility maximization problem over current and future consumption goods can be interpreted as wealth not currently consumed that is invested to yield future consumption. d. All of the above.
Question 4 Explain how does a decrease in the current income y affect the consumer's consumption-saving decision. In particular, explain: 1) How will current consumption c, future consumption c', and savings s change; 2) Are there any substitution effect or income effect. Make sure you draw two figures, one for the borrowers and one for the lenders.
1) Graph the relationship between income and consumption from the table below. 2) Does this relationship have a positive or negative slope? 3) What is the slope from point B to point C? Income Consumption Point $0 $50 A $100 $100 B $200 $150 C $300 $200 D $400 $250 E