According to the life cycle model, people consume each year an amount that depends upon their lifetime income rather than upon their current income. Assume that you expect to receive future income (in constant dollars) according to the schedule in Table 21-6.
a. Assume that there is no interest paid on savings. You have no initial savings. Further assume that you want to "smooth" your consumption (enjoying equal consumption each year) because of diminishing extra satisfaction from extra consumption.
Derive your best consumption trajectory for the 5 years, and write the figures in column (3). Then calculate your saving and enter the amounts in column
(4); put your end-of-period wealth, or cumulative saving, for each year into column (5). What is your average saving rate in the first 4 years?
b. Next, assume that a government social security program taxes you $2000 in each of your working