Suppose Terese gets a sales bonus at her place of work that gives her an extra $600 of disposable income. She chooses to spend $480 and save the remaining $120. From this, you can tell that Terese's marginal propensity to consume (MPC) is , and her marginal propensity to save (MPS) is Mathematically, it must always be true that: Consumption Therefore, it must also be true that: MPC
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- Kenji is buying salad and pizza for a company lunch. Suppose that a bowl of salad costs $3.00, and a slice of pizza costs $4.00. Let E be the amount in dollars that Kenji spends on salad and pizza. If Kenji buys S bowls of salad and P slices of pizza, then the total amount of money he spends (E) can be represented by the equation Now rearrange the equation you wrote above so that P is written in terms of E and S. The quantity of pizza he buys can be represented by the equation Suppose Kenji has $48.00 to spend on salad and pizza; that is, E= $48.00. Complete the following table with the values of S or P that make the equation true. Hint: To complete the first row, determine the number of pizza slices Kenji can purchase with $48.00, when the number of salad bowls he purchases is 0. Pizza Budget Salad (Dollars) (Bowls) (Slices) 48.00 0 48.00 48.00 8 0Seung's utility function is given by U - C^(1/2), where C is consumption and C^(1/2) is the square root of consumption. She makes $50,625 per year and enjoys jumping out of airplanes. There's a 5% chance that in the next year, she will break both legs, incur medical costs of $30,000, and lose an additional $5,000 from missing work. a. What is Seung's expected utility without insurance? b. Suppose Seung can buy insurance that will cover the medical expenses but not the forgone part of her salary. How much would an actuarially fair policy cost, and what is the expected utility if she buys it? Policy cost: $___ Expected utility: ___ c. Suppose Seung can buy insurance that will cover her medical expenses and foregone salary. How much would such a policy cost if it's actuarially fair, and what is her expected utility if she buys it? Policy cost: $___ Expected Utility: ___What are the determinants for an individual demand? Derive with the help of indifferencecurves and the budget constraint the optimal consumption plan. How do you transfer theoptimal consumption plan into an individual demand function?
- When the consumption function lies above the 45-degree line, households * O Spend on consumption an increasing percentage of any increase in income O Spend on consumption a decreasing percentage of any increase in income O Are dissaving O Save all of any increase in incomeFelice lives and works for two periods. In the first period, she earns 520 coconuts and in the second period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes.a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%. Suppose also that she likes to consume today 240 coconuts. Draw herbudget constraint including both intercepts, her endowment point including its coordinates, and use an indifference curve to show her optimal consumption point and its coordinates.b. Suppose that the government cuts taxes by 10 coconuts. What will the government have to do to taxes in the future period to meet its lifetime budget constraint?c. What is the effect of the government’s action on Felice’s lifetime wealth, budget constraint and endowment point? Show and explain.d. What is the effect of the tax cut on her current consumption and welfare? Does the Ricardian equivalence hold? Explain!e. Now suppose that the economy enters a recession, and some…Felice lives and works for two periods. In the first period, she earns 520 coconuts and in the second period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes.a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%. Suppose also that she likes to consume today 240 coconuts. Draw herbudget constraint including both intercepts, her endowment point including its coordinates, and use an indifference curve to show her optimal consumption point and its coordinates.b. Suppose that the government cuts taxes by 10 coconuts. What will the government have to do to taxes in the future period to meet its lifetime budget constraint?c. What is the effect of the government’s action on Felice’s lifetime wealth, budget constraint and endowment point? Show and explain.d. What is the effect of the tax cut on her current consumption and welfare? Does the Ricardian equivalence hold? Explain!e. Now suppose that the economy enters a recession, and some…
- Figure 7.1 C b. 100 In Figure 7.1, all of the following is true except: An additional dollar of income always induces some additional consumption. O There is some level of consumption that is independent of income. O The marginal inclination to consume is greater than zero. O At zero income there is zero consumption.Explain how does adecrease 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) Arethere any substitution effect or income effect. Make sure you draw two figures, one for the borrowersand one for the lenders.Use the black line (plus symbols) to plot the line illustrating the combinations of salad and pizza that Andrew can purchase with a budget of $30.00. PIZZA (Slices) 14 12 10 00 4 2 O to 0 2 4 8 8 SALAD (Bowls) 10 12 14 Initial Budget New Budget ? Now suppose Andrew's income is cut in half: That is, he has 50% less money to spend than he did before. On the previous graph, use the blue line (circle symbols) to plot Andrew's new budget constraint. Which of the following statements best summarizes the pattern of causality captured by the graph above? Check all that apply. The relationship between S and P is not a causal relationship. A change in E causes a shift of the budget constraint. A change in S causes a change in P. A change in P causes a change in S.
- 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.Felice lives and works for two periods. In the first period, she earns 520 coconuts and in thesecond period, she earns 570 coconuts. In each period, she pays 20 coconuts in taxes.a. Suppose that Felice can save or borrow from a bank at the same interest rate of 10%.Suppose also that she likes to consume today 240 coconuts. Draw herbudget constraint including both intercepts, her endowment point including its coordinates,and use an indifference curve to show her optimal consumption point and its coordinates.b. Suppose that the government cuts taxes by 10 coconuts. What will the government haveto do to taxes in the future period to meet its lifetime budget constraint?c. What is the effect of the government’s action on Felice’s lifetime wealth, budgetconstraint and endowment point? Show and explain.d. What is the effect of the tax cut on her current consumption and welfare? Does theRicardian equivalence hold? Explain!e. Now suppose that the economy enters a recession, and some people…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?