homework 2 solutions

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

This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## 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.

### Page1 / 4

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online