Linda earned an income of $3,000 per month which has now increased to $3,500 per month. She saves 10 percent and spends the remainder on food, lodging, and other expenses. So far, she has managed to save $20,000. What is her consumption after the increase?
A) $20,000
B) $3,500
C) $2,700
D) $3,150
E) $450

Question

Quizplus · Accepted Answer

Linda's initial savings rate was 10%, so her initial consumption rate was 90% of her income:
Initial Income: $3,000
Initial Savings: 10% * $3,000 = $300
Initial Consumption: $3,000 - $300 = $2,700

If she has managed to save $20,000 so far, then she must have been saving for (20,000 / 300) = 66.67 months or about 5.56 years.

During this time, her income has increased from $3,000 to $3,500 per month. So, her new savings rate is still 10%:
New Savings: 10% * $3,500 = $350

Her new consumption rate can be calculated as follows:
New Income: $3,500
New Savings: $350
New Consumption: $3,500 - $350 = $3,150

Therefore, Linda's consumption after the increase is $3,150.

Linda Earned an Income of $3,000 Per Month Which Has