Future consumption on the vertical axis

Assignment Help Business Economics

Reference no: EM131391732

Consider Chad, who expects to live for two periods: “now” (period 0) and the “future” (period 1). He earns an income of Io= $20,000, dollars now, and I1= $5,000 in the future when he will be retired from his full-time job. His problem is to decide how much to consume in period 0 and how much in period 1. The market interest rate is r = 10%. Use a consumer’s choice diagram with future consumption on the vertical axis and present consumption on the horizontal axis to address the following points.

a. Sketch Chad’s inter-temporal budget constraint and indicate the numerical values of the intercepts and the slope.

b. Suppose that in the absence of a public pension, Chad chooses to save money in period 0. Illustrate this situation on your diagram with indifference curves. Show how much he saves on your diagram.

c. Suppose now that there is a pay-as-you-go public pension system in place which charges Chad a premium of T = $4,000 in period 0 and pays him benefits of B = (1+r)T in period 1. Show how will this affect his savings decision?

d. Now suppose the pension benefits are given by B = (1+ ρ)T, where ρ < r. Draw a modified version of your diagram in part c to represent this situation. What do you expect to happen to the amount Chad saves?

Reference no: EM131391732

Questions Cloud

About the worldly philosopher : Robert Hielbronner discusses, in the "The Worldly Philosopher," the classical views on growth developed by Thomas Malthus. How does Thomas Malthus economists' view of growth differ from Solow's growth model? Is the classical economist more or less op..

Example of the market structures : Discuss how the assumptions of the basic competitive model must be relaxed so that we may consider economic situations that are more realistic. Define and provide an example of the market structures.

Rise in interest rates due to decrease in the money supply : A contractionary monetary policy is appropriate during a recession. A rise in interest rates due to a decrease in the money supply will _____ aggregate demand.

Can governmental intervention be harmful in special cases : Discuss and graphically illustrate the welfare (Pareto Efficiency) implications of the above market structures. Can governmental intervention improve welfare? Can governmental intervention be harmful in some special cases?

Future consumption on the vertical axis : Consider Chad, who expects to live for two periods: “now” (period 0) and the “future” (period 1). He earns an income of Io= $20,000, dollars now, and I1= $5,000 in the future when he will be retired from his full-time job. Use a consumer’s choice dia..

The equilibrium interest rate : A decrease in the supply of money with no change in demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

Why according to chairwoman ramirez is ftc not infallible : Why, according to Chairwoman Ramirez, is the FTC “not infallible?”

Fair competition review : FTC Commissioner Maureen Ohlausen, in her October 27, 2016, speech titled China’s Fair Competition Review: Insights From the U.S. Experience at the 2016 China Competition Policy Annual Forum in Beijing, suggested that Chinese antitrust enforcement of..

Captures chairwoman ramirez vision : From the following analogies, select the one that best captures Chairwoman Ramirez’ vision of the FTC’s proper role in the USA’s market based economy.

User Account

All Pages