Consumers must decide how much they wish to consume today (c.) versus in the future (c.)....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consumers must decide how much they wish to consume today (c.) versus in the future (c.). In making their decisions, they are constrained by the amount of their present income (v.) and future income (y.). Future income is related to present income in the following way: y = (1+g)y,, where g = the growth rate of income (1) The real interest rate in this economy is r and individuals can lend and borrow at this rate. a) Use the above information to derive first the households' level of consumption in period 2 and then their inter-temporal budget constraint. b) Using logs, the inter-temporal utility function of the representative consumer is given by: In(c.c,)=a In(c,)+(1-a)ln(c,) (2) The coefficients a and 1-a represent the weights placed on present and future consumption. [Hint: In doing the question, remember for any variable x, that the derivative of the natural log is given by d In(x) = dx/x.] 1) Starting with the inter-temporal utility function (equation (2)), find the algebraic relationship between present and future consumption that maximizes utility ( In(c.c,)). 2) Then, using that relationship, find an equation for present consumption as it relates to only present income, wealth and the real interest rate. 3) Next, find an expression for the average propensity to consume (APC), defined as current consumption divided by current income, e,/y,. c) In Canada, the average propensity has been around 0.96 since 2000. Over that same period, real personal disposable income has grown by 24%, while real interest rates have averaged 24% (actually they quite a bit lower right now). Use your equation for APC to find the value of a for the Canadian economy. Based on that value, do Canadian consumers put more or less weight on present versus future consumption? Consumers must decide how much they wish to consume today (c.) versus in the future (c.). In making their decisions, they are constrained by the amount of their present income (v.) and future income (y.). Future income is related to present income in the following way: y = (1+g)y,, where g = the growth rate of income (1) The real interest rate in this economy is r and individuals can lend and borrow at this rate. a) Use the above information to derive first the households' level of consumption in period 2 and then their inter-temporal budget constraint. b) Using logs, the inter-temporal utility function of the representative consumer is given by: In(c.c,)=a In(c,)+(1-a)ln(c,) (2) The coefficients a and 1-a represent the weights placed on present and future consumption. [Hint: In doing the question, remember for any variable x, that the derivative of the natural log is given by d In(x) = dx/x.] 1) Starting with the inter-temporal utility function (equation (2)), find the algebraic relationship between present and future consumption that maximizes utility ( In(c.c,)). 2) Then, using that relationship, find an equation for present consumption as it relates to only present income, wealth and the real interest rate. 3) Next, find an expression for the average propensity to consume (APC), defined as current consumption divided by current income, e,/y,. c) In Canada, the average propensity has been around 0.96 since 2000. Over that same period, real personal disposable income has grown by 24%, while real interest rates have averaged 24% (actually they quite a bit lower right now). Use your equation for APC to find the value of a for the Canadian economy. Based on that value, do Canadian consumers put more or less weight on present versus future consumption?
Expert Answer:
Related Book For
Posted Date:
Students also viewed these economics questions
-
A concern produces and sells 20,000 units at $100 each. Its variable cost is $50 per unit and fixed cost of concern is $4,00,000. Calculate; (a). P/V ratio, (b). Break-even sales, (c). Break-even...
-
Economics can you please show the graph answers on a graph. Thank you 2182502& CENGAGE MINDTAP Q Search this ca Homework (Ch 08) Back to Assignment Tools Attempte Average/5 2. Marginal analysis
-
Explain how planning involves making decisions today that will have an impact later.
-
If the end of the cord is pulled downward with speed v C , determine the angular velocities of pulleys A and B and the speed of block D. Assume that the cord does not slip on the pulleys. Given: VC =...
-
Based on sample data, the 95% confidence interval for the slope of the population regression line is found to be from 4.2 to 6.7. Based on this information, what is the most accurate statement that...
-
Which menus are used to create budget reports in QuickBooks Accountant?
-
The accounting records of Dwter Minerals Corporation provide income statement data for 2008. Total expenses include depreciation of \(\$ 50,000\) computed under the straight-line method. In...
-
Rutherford Wheel and Axle, Inc. has an automate production process, and production activity is quantified in terms of process hours. A standard-costing system is used. The annual static budget for...
-
Consider a $150 million fund with 17.5% incentive fees and a hard hurdle rate of 9% that lasts a single year. The fund earns a 22% return. What incentive fee would the fund manager collect?
-
Macon Machines Company began operations on November 1, 2024. The main operating goal of the company is to sell high end robots. Customers may pay using cash or if appropriate, credit is extended to...
-
Determine a so that the vector u= is a f vectors voT$], w=[:] - linear combination uzav+bw 3
-
Why do angel investors coordinate through networks or groups?
-
How should entrepreneurs manage their valuation profile across stages?
-
How do accelerators, incubators, and technology transfer funds prepare companies for fundraising?
-
What aspects enter into the formulation of an investors dynamic investment strategy?
-
How does an ICO differ from an IPO?
-
The Company's Audit Committee charter requires that the Audit Committee review and approve all related party transactions required to be disclosed pursuant to SEC rules. In doing so, the Audit...
-
1. Advertising for eyeglasses _________ (increases/decreases) the price of eyeglasses because advertising promotes _________. 2. An advertisement that succeeds in getting consumers to try the product...
-
What is organizational performance?
-
1. What has made Blue Birds quality initiative successful? Discuss how you think each of the programs the company implemented contributed to what it is today. 2. How might value chain management...
-
Do the followers make a difference in whether a leader is effective? Discuss.
-
Find the natural frequency of the system shown in Fig. 2.55 with and without the springs \(k_{1}\) and \(k_{2}\) in the middle of the elastic beam. a b k 0000 0000 m FIGURE 2.55 Elastic beam with...
-
A rotating machine weighing \(1000 \mathrm{~N}\) (including the foundation block) is isolated by supporting it on six identical helical springs, as shown in Fig. 2.54. Design the springs so that the...
-
Find the natural frequency of the pulley system shown in Fig. 2.56 by neglecting the friction and the masses of the pulleys. 0000 m k 0000 4k 0000 4k FIGURE 2.56 Pulley system with springs and mass.
Study smarter with the SolutionInn App