John is planning ahead for retirement in a two-period world.When John is young he will earn $1 million,and when John is old and retired he will be given $50,000 from Social Security.If the interest rate between the two time periods is 7 percent,what is the slope of John's budget constraint when considering the consumption possibilities between the two periods if "consumption when young" is graphed on the horizontal axis?
A)-0.89
B)-1.05
C)-1.07
D)-1.12

Question

Quizplus · Accepted Answer

The slope of the budget constraint is equal to the negative of the ratio of the marginal utility of consumption when young to the marginal utility of consumption when old. In this case, the marginal utility of consumption when young is equal to the marginal utility of consumption when old multiplied by the interest rate. Therefore, the slope of the budget constraint is equal to -1/(1+r) = -1/(1+0.07) = -1.07.

John Is Planning Ahead for Retirement in a Two-Period World