Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.Yearly taxes are $20 000,and Hector received a one-time tax rebate of $5000 during his first year of work.Shortly after the tax rebate is announced,the government unexpectedly announces that the one-time tax rebate will actually become a permanent tax reduction.If Hector completely smooths consumption over his lifetime,his annual consumption will increase by ________ due to the tax rebate becoming permanent in the following year.
A) $2733.33
B) $3666.67
C) $3750.00
D) $5000.00

Question

Quizplus · Accepted Answer

There are a few steps to calculate the increase in Hector's annual consumption:
First, we need to calculate Hector's after-tax income:
$80 000 - $20 000 = $60 000
Then, we need to calculate Hector's consumption before the tax rebate becomes permanent:
$60 000 x 45 years = $2 700 000
Next, we need to calculate Hector's consumption in the year he receives the tax rebate:
$60 000 + $5000 = $65 000
Finally, we can calculate Hector's post-tax consumption in the year after the tax rebate becomes permanent:
($80 000 - $15 000) x 45 years = $3 075 000
Therefore, the increase in Hector's annual consumption is:
($3 075 000 - $2 700 000 - $65 000) / 60 years = $3666.67 per year.

Hector's Wealth Is Zero,he Expects to Work for Another 45