Wealth substitution effect of public pension

Assignment Help Business Economics

Reference no: EM131389731

Consider Blanche, who expects to live for two periods: “now” (period 0) and the “future” (period 1). She earns an income of $40,000 dollars now, but zero in the future since she will be retired. Her problem is to decide how much to consume in period 0 and how much to save for period 1. The market interest rate is 6%. Her utility function is U=(Co)^(3/4) (C1)^(1/4). and hence her marginal rate of substitution between present and future consumption is dC1/dC0 = 3C1/C0. 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. In the absence of a public pension, show how much she will save?

b. Suppose that there is a pay-as-you-go public pension system in place which charges Blanche a premium of $6,000 in period 0 and pays her benefits of $6,360 in period 1. How much will Blanche save now?

c. How will the pay-as-you-go public pension affect total saving in society? (Explain your answer.)

d. What is meant by the “wealth substitution effect” of a public pension?

Reference no: EM131389731

Questions Cloud

What can the parties do to best protect themselves : What are the rights of Lincoln, Donaldson, Carter, and Thompson? What can the parties do to best protect themselves?

Identify three potential areas of concern within the lease : Think about a time you have rented property in the past. For example, you may have rented an apartment, rehearsal space, or storage space. Perhaps you remember the huge document you signed called a lease? Most likely, that document was over long, ..

Strategic human resource management twelve month plan : GB520 Strategic Human Resource Management Assessment Report. Research project report: Strategic Human Resource Management Twelve Month Plan

What if anita subsequently sent bertrum an e mail : What if Anita subsequently sent Bertrum an e-mail that met all the requirements of an effective security agreement?

Wealth substitution effect of public pension : Consider Blanche, who expects to live for two periods: “now” (period 0) and the “future” (period 1). She earns an income of $40,000 dollars now, but zero in the future since she will be retired. Her problem is to decide how much to consume in period ..

What advice would you give to dean based upon your analysis : MTH410- What advice would you give to the dean based upon your analysis of the data? Focus your advice on answering the following: What is the magnitude of the issue? What would you recommend for both students and faculty?

What if clark intended to use the television set in his home : What if, instead of Aaron's selling the television set to Clark, a judgment creditor levied (sought possession) on the television? Who would prevail?

Reduce the level of household consumption spending : Which of the following will cause a country's production possibilities line to shift outward? Which of the following would reduce the level of household consumption spending?

Does first national have an enforceable security interest : Upon A-Herts's failure to pay, First National is seeking to repossess the car from Jones. Does First National have an enforceable security interest in the car against Jones? Explain.

User Account

All Pages