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Question No. 2 Life-Cycle Hypothesis a. Suppose a person expects to live six periods. This person...

Question No. 2 Life-Cycle Hypothesis

a. Suppose a person expects to live six periods. This person has no accumulated wealth and receives an income of $15, $20, $25, $30 in each of the first 4 periods, respectively. After period 4 this person retires and receives no wage income. Assuming this person follows the life cycle consumption function, prepare a table showing income,consumption and saving in each of the 6 years of the person’s life. Assume the interestrate is zero for parts a, b and c.

b. Suppose this person wins the lottery in period 1 for $30 (this is equivalent to an increase in wealth). Prepare a second table showing income, consumption and saving in each of the 6 periods of the person’s life. What is the MPC out of the temporary changein income?

c. Rather than winning the lottery in period 1, suppose this person gets and unexpected salary increase of $10 per period. Prepare a third table showing income, consumption andsaving in each of the 6 years of the person’s life. What is the MPC out of this permanentchange in income?

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Rahul Sunny answered 1 year ago
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