Question

. 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.​ Please being organize

Answer 1

Answer. Definitely Yes, our spending habits will change. It's a general concept that whenever our income changes, our consumption habits changes. There is a famous law given by JM Keynes, The psychological law of consumption. It states that, as our aggregate income increases, we will spend more on consumption. There is a famous consumption function given by Keynes,

C = A + bY

Where, C = Aggregate consumption

A = Autonomous consumption, it is independent of change in income. We need to spend on basic necessities or goods and services even if our income is zero. This spending is financed by savings.

b = Marginal propensity to consume, it is defined as the change in consumption due to change in income. If 'b' is high, we will consume more of increase in income and save less and vice versa.

Y = Aggregate Income

We are generally assuming that our MPC is high, so we will spend more on consumption from the increase in our income. With a very high increase in income, we will buy more luxury goods and services which are of social status and consume in quantities depending upon their use and price.

Before the lottery, we are spending our income on basic goods and services which are essential for our daily life and less on other luxuries goods and services. But with a sudden rise in aggregate income, we will start spending on other luxury goods as well. The other 50 million deposited in bank will also earn huge interest, so that is also going to increase our future income. So, our consumption pattern will change. Total consumption will increase.