Problem:

(a) (i) Assuming that a household uses a subjective discount rate of 10%, calculate the amount that she must spend on consumption per annum during her years of existence when she expects to draw a net income of Rs 250,000 for 60 years and to receive a pension of Rs 80,000 for the remaining years of her life until the age of 75, the year of her death.

(ii) Suppose the household under-rated her annual pension by Rs 20,000 for the last 5 years of her life-time, compute the unintentional bequest that would accrue to her akin at her time of death.

(iii) How would your answer to (i) change if the household decides to account for the expected average inflation rate of the order of 5% in her discounting exercise.

(b) (i) Derive the inter-temporal budget constraint of a household who lives over two periods, assuming that lending and deposit rates coincide.

(ii) How would a divergence between lending and deposit rates influence the household's consumption in the second period of her existence?