Consider a model in which an individual lives only two periods. The individual has diminishing marginal utility of consumption and receives an income of RM100,000 in the first period and an income RM6,000 in the second period. The private interest rate is 10 percent for each period, in which the individual can borrow or lend money at this rate. Assume also that the individual intends to consume all of her income overs his lifetime. i) ii) If there is no Social Security program, what is the individual's optimal consumption in each period? Assume that there is a Social Security program that takes RM6,000 from the individual in the first period and pays her this amount with interest in the second period. What is the impact of this system on the individual's saving?

Consider a model in which an individual lives only two periods. The individual has diminishing marginal utility of consumption and receives an income of RM100,000 in the first period and an income RM6,000 in the second period. The private interest rate is 10 percent for each period, in which the individual can borrow or lend money at this rate. Assume also that the individual intends to consume all of her income overs his lifetime. i) ii) If there is no Social Security program, what is the individual's optimal consumption in each period? Assume that there is a Social Security program that takes RM6,000 from the individual in the first period and pays her this amount with interest in the second period. What is the impact of this system on the individual's saving?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a model in which an individual lives only two periods. The individual has diminishing marginal utility of consumption and receives an income of RM100,000 in the first period and an income RM6,000 in the second period. The private interest rate is 10 percent for each period, in which the individual can borrow or lend money at this rate. Assume also that the individual intends to consume all of her income overs his lifetime. i) ii) If there is no Social Security program, what is the individual's optimal consumption in each period? Assume that there is a Social Security program that takes RM6,000 from the individual in the first period and pays her this amount with interest in the second period. What is the impact of this system on the individual's saving?
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A consumer's consumption-utility function for a two period horizon is 0.5 U(Cg,G) =C,G" he consumer's earned income stream is given by mo, m1 and the market rate of interest is r. a) Write the intertemporal budget constraint in present value terms. If the consumer does not consume anything in peripd 0, what is the most she can consume in period 1? b) Draw a graph that shows optimal consumption in each period co* and c1*. What is the slope of her budget line? c) Solve the problem for optimal consumption in each period co* and c;*. d) Suppose mọ is S50 and mị is S110 and r = 0.1. Is the consumer a borrower or a lender? Show this outcome by drawing co*. C1*, mo, mį, and bond-holdings on your graph.
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Suppose a consumer has $1500 in the current time period and $1100 in the future time period.Suppose also that the consumer can borrow and lend freely and, unless otherwise specified, borrowing and lending interest rates are the same. (a) If the interest rate between time periods is 50%, what is the budget constraint between consumption in the present and consumption in the future? (B) If the interest rate at which the consumer can borrow is 75% but the rate at which she can lend is25%, what is the budget constraint? (C) Suppose the interest rate is 50%. If the consumer has to pay a fee of 10% of the loan amount in order to borrow money, what is the budget constraint?
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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?
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Anna has endowment 1500 now and 500 later. Internet rate is 2.0%. She prefers smooth consumption to time (i.e., u0=u1=u). a. Assume utility function, u(c)= log c. What are the optimal consumption c0and c1if Anna's beta=1, and she wants to maximize her utility? b. Now assume that the utility function, u(c)=c0.5. If everything else remains the same as Problem 1(a), what are the optimal consumption c0and c1if Anna wants to maximize her utility?
Over a three-year period, an individual exhibits the following consumption behavior: Px Py x y Year 1 3 3 7 4 Year 2 4 2 6 6 Year 3 5 1 7 3 Is this behavior consistent with the axioms of revealed preference?