Question

Suppose there are two working individuals in Jamaica, one who has a formal employment and
works for the government, John, and the other who is self-employed, Sue. John, since he is
working for the government, has to contribute to the National Insurance Scheme (NIS) out of
his working income and this will go towards his annual pension on retirement. Sue, on the other
hand, since she is self-employed, has to save towards her own pension.
Suppose that they both make the same annual income, Y, have no initial wealth and want to
have the same level of consumption each year both in their working life and when they retire.
Construct a consumption function for John and Sue. Explain if there is any difference between
the annual consumption of John and Sue.

Answer 1

consumption is a function of income as income increases consumption increases but not at the same rate.