Assume that Jeannie Drago is trying to allocate her consumption over two periods of life: work and retirement. Each period is to last 20 years. To simplify, assume that all income comes at time t₁ in the middle of 20 years of work, and all expenditures come at either t₁ or t₂, 20 years later. Jeannie's budget constraint is C₁ + C₂/(1 + r/100) = Y₁ + Y₂/(1 + r/100), where the real interest rate r is 100 percent (approximately 3.5 percent per year over 20 years). Jeannie's preferences are to have equal consumption each period.

a. What are $C _ { 1 }$ and $C _ { 2 }$ if $Y _ { 1 } = 1$ million and $Y _ { 2 } = 0$ ?
b. What are $C _ { 1 }$ and $C _ { 2 }$ if $Y _ { 1 } = 0$ and $Y _ { 2 } = 1$ million (reflecting, for example, an individual who plans to come into a large inheritance late in life)? Do these answers depend on Jeannie's being able to borrow against the inheritance?

Question

Assume that Jeannie Drago is trying to allocate her consumption over two periods of life: work and retirement. Each period is to last 20 years. To simplify, assume that all income comes at time t₁ in the middle of 20 years of work, and all expenditures come at either t₁ or t₂, 20 years later. Jeannie's budget constraint is C₁ + C₂/(1 + r/100) = Y₁ + Y₂/(1 + r/100), where the real interest rate r is 100 percent (approximately 3.5 percent per year over 20 years). Jeannie's preferences are to have equal consumption each period.

a. What are

C _ { 1 }

and

C _ { 2 }

if

Y _ { 1 } = 1

million and

Y _ { 2 } = 0

?
b. What are

C _ { 1 }

and

C _ { 2 }

if

Y _ { 1 } = 0

and

Y _ { 2 } = 1

million (reflecting, for example, an individual who plans to come into a large inheritance late in life)? Do these answers depend on Jeannie's being able to borrow against the inheritance?

Quizplus · Accepted Answer

The Answer of Assume that Jeannie Drago is trying to allocate her consumption over two periods of life: work and retirement. Each period is to last 20 years. To simplify, assume that all income comes at time t₁ in the middle of 20 years of work, and all expenditures come at either t₁ or t₂, 20 years later. Jeannie's budget constraint is C₁ + C₂/(1 + r/100) = Y₁ + Y₂/(1 + r/100), where the real interest rate r is 100 percent (approximately 3.5 percent per year over 20 years). Jeannie's preferences are to have equal consumption each period. a. What are $C _ { 1 }$ and $C _ { 2 }$ if $Y _ { 1 } = 1$ million and $Y _ { 2 } = 0$ ? b. What are $C _ { 1 }$ and $C _ { 2 }$ if $Y _ { 1 } = 0$ and $Y _ { 2 } = 1$ million (reflecting, for example, an individual who plans to come into a large inheritance late in life)? Do these answers depend on Jeannie's being able to borrow against the inheritance?

Assume That Jeannie Drago Is Trying to Allocate Her Consumption C1C _ { 1 }C1​

Assume That Jeannie Drago Is Trying to Allocate Her Consumption $C _ { 1 }$