consumption, Macroeconomics

(40 points) Consider two consumers, A and B. A and B both want perfect consumption smoothing (c = cf) and both have no current wealth. However, the two consumers have different income streams. Person A’s current income, yA, = 100, and future income, yfA, = 121. Person B’s current income, yB, is 120, and future income, yfB, = is 99. The real interest rate is 10%.

(a). Calculate the present value of lifetime resources (PVLR) for consumer A and consumer B, respectively.
(b). Draw consumer A’s budget constraint. How does the budget constraint of consumer A compare to the budget constraint of consumer B? Explain.
(c). Find consumer A’s optimal lifetime consumption plan, (cA, cfA). How does consumer B’s optimal lifetime consumption plan, (cB, cfB), compare to consumer A’s lifetime consumption plan? Explain.
(d). Is consumer A a current saver or a current borrower? Explain. Is consumer B a current saver or a current borrower? Explain.
(e). Draw a graph that illustrates how an increase in the interest rate (above 0.10) will affect the budget constraints of consumer A and consumer B. How does the budget constraint of consumer A compare to the budget constraint of consumer B?
Posted Date: 3/13/2013 11:58:13 PM | Location : United States







Related Discussions:- consumption, Assignment Help, Ask Question on consumption, Get Answer, Expert's Help, consumption Discussions

Write discussion on consumption
Your posts are moderated
Related Questions
Engineers sometimes add chlorine to pipes to disinfect water. It is desired to achieve four logs of kill. This means that the effluent concentration of microorganisms is 10 -4 tim

How do countries grow Economic growth? Economic growth is attaining by increasing: • Quantity of resources by investment • Quality of resources by training as well as R

Macro Economics 1. How was the Classical Theory of interest role criticized by Keynes? 2. Illustrate the barter system that was used in early times in lieu of money. 3.

Roles of government in controlling market forces under neoclassical view

Consumer Equilibrium: According to our assumption for 'x' units consumption of the commodity, gross utility obtained by the consumer is U(x).But for this, the consumer must sp

Suppose home cost pricing prevails in international trade, while world output is declining. Consider two economies, A and B, both having floating exchange rates and the same moneta

Q. How to control Monetary policy? Remember that the money supply is equal to the money multiplier times the monetary base. We will presume that money multiplier is constant an

Compare and contrast federal government expenditures, state and local government expenditures, and financing government expenditures. Suggest a total of three actions that should b

A profit maximizing firm has a production function such that: Y=K2L2 a) If P=10,rk=2,andWL=3 , what would be its optimum be? How can you show that it is a maximum? b) How

When Sonoma Vineyards reduces the price of its Cabernet Sauvignon from $15 a bottle to $12 a bottle, the result is an increase in a. the demand for this wine b. the supply of