An individual has $60,000 income in period 0 and $30,000 income in period 1. If the individual desires to consume $19,000 in period 1 and the market interest rate is 8%, what is the maximum amount of consumption in period 0?
A) $50,000
B) $70,185
C) $71,000
D) $61,880

Question

Quizplus · Accepted Answer

To find the maximum consumption in period 0, calculate the present value of period 1's desired consumption and add it to period 0's income. The present value of $19,000 at 8% is $19,000 / (1 + 0.08) = $17,592.59. Adding this to $60,000 gives $77,592.59. However, since the individual wants to consume $19,000 in period 1, they can only use the remaining $11,000 from period 1's income in period 0. Thus, $60,000 + $11,000 = $71,000. But since $71,000 is not an option, the closest correct calculation is $70,185, which accounts for the interest adjustment.

An Individual Has $60,000 Income in Period 0 and $30,000