Question

1. You just won 100 million playing the lottery yesterday and you deposit 50 million in the local bank. Would you spending habits and the way you think about and select goods and service change compared to the way it was before you won lottery? what types of goods would you buy and in what quantities? why? Please explain it by some economic concept as much detail as possible.

Answer 1

There are many ways to approach this

it mainly depends on how rational the consumer is. the consumer is partly rational because an amount from the lottery is already kepy in bank.

if the consumer is poor and was living on the bare subsistence ie consuming inferior goods , then there would be a change in the pattern of goods beiung consumed ie the consumer would shift towards the normal goods,

a thing that should be kept in mind is that this lottery is not an increase in the permanent income of the consumer . only his welath has increased ie it is a stock and not a permanent flow of increased income.

so if the consumer is rational and farsighted , he would not take it as a permanent change and hence wont spend on consumer goods which are totally wasteful and unncessary.

rather the individual could use it in investments like buying fixed assets like house, property or land from where in long term rents could be extracted. the individual should be artional enough to not leave the work he is currently pursuing though an improvemnet in his living standards could be seen .

if the consumer is shortsighted and not rational , then he would probably spend the amount on wasteful activities like buying luxury goods and enjoying luxury services which would be short term and not fruitful. also this way the consumer wont be benefitted in the future with the huge amount he ahd won.

the important point here is for the consumer to know the difference in income and wealth . the money he received here is wealth and can be easily exhausted because it is a one time win. but if the individual tries and invests this welath rather than focus on consumption of luxury goods , it can help him in the long run and improve his overall liviong standard and income . ( income through non wage methods like interest rate from banks or rents received from leasing the fixed asset purchased )

so it is important to look at the way the consumer reacts with the lottery won. he can either look it from immediate and wasteless consumption point of view or could use it as an investemnet which could increase his income and hence his consumption in future periods as well . ( intertemporal advantage)