Mr. Bird has $100 income this year and zero income next year. The market interest rate is 10 percent per year. Mr. Bird also has an investment opportunity in which he can invest $50 today and receive $80 next year. Suppose Mr. Bird consumes $30 this year and invests in the project. What will be his consumption next year?
A)$80
B)$82
C)$100
D)$102

Question

Quizplus · Accepted Answer

Mr. Bird consumes $30 this year, leaving him with $70 ($100 - $30). He invests $50 in the project, leaving him with $20. The $20 can be saved at a 10% interest rate, giving him $22 next year. The investment returns $80 next year. Therefore, his total consumption next year is $22 + $80 = $102.

Mr Bird Has $100 Income This Year and Zero Income