Jill has a period 1 endowment of E,=$35,000. Her optimal period 1 consumption is C1=$45,000. How much does current consumption (Co) have to fall if R=5%? 2.
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- A firm decides to pay total dividends of $100,000 in period 1 and $471,000 in period 2. Charlie owns 10% of the firm and has no other wealth or income. What is Charlie’s maximum period 2 consumption (C2) if the market rate of return (i) is 10.00% and he plans to consume $7,000 in period 1 (C1)?Assume a consumer has current-period income y = 200, future-period income y′ = 150, current and future taxes t = 40 and t′ = 50, respectively, and faces a market real interest rate of r = 0.05, or 5% per period. The consumer would like to consume according to the following utility function: U (c, c′ ) = ln(c) + ln(c′ ). Show mathematically the lifetime budget constraint for this consumer. Find the optimal consumption in the current and future periods and optimal saving. Suppose that instead of r = 0.05 the interest rate is r = 0.1. Repeat parts (a) and (b). Does the substitution effect or the income effect dominate?Calua is an economy in which people live for three periods. They receive an endowment in only one period as follows: 80 goods when young, or 90 goods when middle-aged or 115 goods when old. The real interest rate in Calua is 10%. Given this information, what endowment should a typical person choose? Assume the interest rate increases to 15%. Which endowment should a typical person now choose?
- Explain the assumption regarding consumers’ behavior in the life-cycle-permanent-income hypothesis which needs to be changed in order to explain the presence of precautionary, or buffer-stock saving.Imagine an investor who has money to invest and two alternative investment possibilities, asset A or asset B. If the price of asset A is £100 and the investor expects that one year later he can sell asset A for £120, the expected rate of return on asset A isQ1 4. Suppose you earn same income as one of your cousins but expect to live longer than your cousin, how would your consumption function be different than that of your cousin? Would you consumer more or less than him? 6. Average propensity to consumer along a linear consumption function is always constant; true or false? Justify your response.