According to the permanent-income theory, which of the following would have the greatest impact on the current consumption of a 45 year-old tenured college professor?
A)a promotion to full professor combined with a $5,000 raise
B)a $5,100 advance payment for a book that will take two years to write
C)winning $5,200 in the Reader's Digest Sweepstakes
D)a loss of a stamp collection worth $5,400
E)an inheritance of $5,500 from a distant uncle

Question

Quizplus · Accepted Answer

According to the permanent-income theory, individuals base their current consumption not only on their current income but also on their expected income over the long-term (their permanent income). As a tenured professor, the individual's income is likely to be relatively stable and predictable, and a promotion to full professor combined with a $5,000 raise would increase their permanent income, leading to a greater impact on their current consumption than any of the other options. The other options may provide a one-time boost to income, but they are less likely to have a significant impact on the individual's permanent income and, therefore, their current consumption.

According to the Permanent-Income Theory, Which of the Following Would