Mr.Bird has $100 income this year and zero income next year.The market interest rate is 10% 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 invests $50 in the project, leaving him with $50 this year. After consuming $30, he has $20 left. He can save this $20 at a 10% interest rate, which will grow to $22 next year. The project returns $80 next year, so his total consumption next year will be $80 + $22 = $102.

MrBird Has $100 Income This Year and Zero Income Next