HW9S_302 - Econ 302 Solution to problem set 9 Spring...

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Econ 302- Solution to problem set 9 Spring 2010-Ali Toossi Due: Wednesday April 7 Chapter 5: Questions for review Answer to question 5. The interest rate is the premium required to move future income to the present. Since future goods are on the vertical axis and present goods are on the horizontal axis the budget line becomes an exchange rate between future and present income. Answer to question 7. According to the permanent income hypothesis, consumption in each year is a constant proportion of the present value of lifetime income, or permanent income. Jennifer's lottery winnings more than double her current income, but have a much smaller proportional effect on her permanent income. So the proportional increase in her current consumption should be smaller than the proportional increase in her current income. Chapter 5: Problems Answer to problem7. PV = 210 + 210/1.05 = 210 + 200 = 410 . C C 430.5 210 1 2 462 Budget constraint when r = 0.20 Budget constraint when r = 0.05 210 385 410 1

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