PS3_Econ314_Solution-1 - Professor: Henry Y. Wan, Jr. TA:...

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Professor: Henry Y. Wan, Jr. Spring 2008 TA: Yu Zhang Econ 314 Problem Set 3 (due on Feb.22 in TA section) Essay Questions 1. How would each of the following affect Cheryl Shirker’s current consumption and saving? Cheryl is a forward-looking consumer with no borrowing constraints. (a) Cheryl’s firm announces a reorganization plan, increasing Cheryl’s future income dramatically. (b) Cheryl’s father, who had planned to leave her a large bequest, must spend all his wealth on medical bills after a prolonged illness. (c) The real interest rate rises from its original level. Cheryl originally planned to have no assets for the future; that is, she planned to spend all her original assets and all her income when she was young, and planned to consume an amount equal to her future income when she was old. Answers: (a) The rise in future income raises her current consumption and reduces her saving. (b) The reduction in her wealth reduces her current consumption and raises her saving.
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This note was uploaded on 09/30/2008 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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PS3_Econ314_Solution-1 - Professor: Henry Y. Wan, Jr. TA:...

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