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Expected value of lifetime earnings

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Consider a consumer who lives for three periods: youth, middle age and old age.When young, the consumer earns $20.000 in labor income. Earnings during the middle age are uncertain: there is a 50% chance that the consumer will earn$40.000 and a 50% chance that the consumer earns $100.000. When old, the consumer spends savings accumulated from the previous periods. Assume that inflation, expected inflation, and the real interest rate are equal to zero. Ignore taxes for this problem.

  • What is the expected value of lifetime earnings in the middle period of life?
  • Given this number, what is the present discounted value of the expected lifetime labor earnings?
  • If the consumer wishes to maintain constant expected consumption over her lifetime, how much will she consumer in each period?
  • How will she save in each period?

Reference no: EM131043256

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