Reference no: EM131145657
A consumer has nonhuman wealth equal to $100,000. She earns $40,000 this year and expects her salary to increase by 5% in real terms each year for the following two years. She will then retire. The real interest rate is equal to 0% and is expected to remain at 0% in the future. Labor income is taxed at a rate of 25%.
a. What is this consumer's human wealth?
b. What is her total wealth?
c. If she expects to live for seven more years after retiring, and wants her consumption to remain the same (in real terms) every year from now on, how much can she consume this year?
d. If she received a bonus of $20,000 in the current year only, with all future salary payments remaining as stated earlier, by how much could this consumer increase consumption now and in the future?
e. Suppose now that at retirement, Social Security will start paying benefits each year equal to 60% of this consumer's earnings during her last working year. Assume that benefits are not taxed. How much can she consume this year and still maintain constant consumption over her lifetime?
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