In Irving Fisher's two-period consumption model, if Y₁ = 20,000, Y₂ = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period two is: A) 15,000. B) 25,000. C) 35,000. D) 45,000.

Question

Quizplus · Accepted Answer

The maximum possible consumption in period two occurs when all income from both periods is consumed in period two. The future value of period one income is 20,000 * (1 + 0.50) = 30,000. Adding period two income gives 30,000 + 15,000 = 45,000.

In Irving Fisher's Two-Period Consumption Model, If Y1 = 20,000

In Irving Fisher's Two-Period Consumption Model, If Y₁ = 20,000