homework 2 solutions

homework 2 solutions - Econ 1110 Spring 2008 Assignment 2...

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Econ 1110 Spring 2008 Assignment 2 Solutions 1. Exercise 1 in [AB] (Numerical Problems) First, a general formulation of the problem is useful. With income of Y 1 in the first year and Y 2 in the second year, the consumer saves Y 1 C in the first year and Y 2 C in the second year, where C is the consumption amount, which is the same in both years. Saving in the first year earns interest at rate r , where r is the real interest rate. And the consumer needs to accumulate just enough after two years to pay for college tuition, in the amount T . So the key equation is ( Y 1 C )(1 + r ) + ( Y 2 C ) = T . (a) Y 1 = Y 2 = $50,000, r = 10%, T = $12,600. The key equation gives ($50,000 – C )1.1 + ($50,000 C ) = $12,600. This can be simplified to $50,000 – C = $12,600/2.1 = $6000, which can be solved to get C = $44,000. Then S = Y C = $50,000 – $44,000 = $6000. (b) Y 1 = $54,200. The key equation is now ($54,200 – C )1.1 + ($50,000 – C ) = $12,600. This can be simplified to ($54,200 × 1.1) + $50,000 – $12,600 = 2.1 C , or $97,020 = 2.1 C , so C = $46,200. Then S = Y 1 C = $54,200 – $46,200 = $8000. This illustrates that a rise in current income increases saving. (c) Y 2 = $54,200. The key equation is now ($50,000 – C )1.1 + ($54,200 – C ) = $12,600. This can be simplified to ($50,000 × 1.1) + $54,200 – $12,600 = 2.1 C , or $96,600 = 2.1 C , so C = $46,000. Then S = Y 1 C = $50,000 – $46,000
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This homework help was uploaded on 04/15/2008 for the course ECON 1110 taught by Professor Tedloch-temzelides during the Spring '08 term at Pittsburgh.

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homework 2 solutions - Econ 1110 Spring 2008 Assignment 2...

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