Ms.Venus has $100 income this year and $110 next year.The market interest rate is 10% per year.Suppose Ms.Venus consumes $60 this year.What will be her consumption next year?
A)$120
B)$154
C)$170
D)210

Question

Quizplus · Accepted Answer

First, we need to calculate Ms.Venus' saving this year using the market interest rate:
S = (1+r)Y - C
S = (1+0.1)($100) - $60
S = $50
Ms.Venus' saving this year is $50. This saving will be added to her income next year and will earn an interest of 10%. Therefore:
C2 = (1+r)S + Y2
C2 = (1+0.1)($50) + $110
C2 = $55 + $110
C2 = $165
Ms.Venus' consumption next year will be $165. However, we need to subtract her saving next year to get her actual consumption:
C2 = $165 - S2
C2 = $165 - [(1+0.1)($50)]
C2 = $165 - $55
C2 = $110
Therefore, Ms.Venus' consumption next year will be $110. However, this option is not given in the choices. The closest option is B) $154. It is possible that Ms.Venus may choose to consume more than $110 next year if she saves less than $50, but it is not possible to determine this with the given information.

MsVenus Has $100 Income This Year and $110 Next Year