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Home Assignment #8: Answer Key
The economy of Avataria has people in three income categories: poor, middle class, and rich. The
poor ear $500 per year and have to spend it all to meet their consumption needs. The middle class
earn $2,000 per year, of which $1,500 is spent and the rest saved. The rich earn $10,000 per year,
and consume 80% of it, saving the rest.
(a) Calculate the overall saving rate in Avataria if 20% of the people are poor and 50% are in the
middle class.
Answer: Let’s denote the number of people by N. Then
Group
#
people
Group
Income
Group
Savings
Poor
0.2N
100N
0
Middle
0.5N
1000N
250N
Rich
0.3N
3000N
600N
Total
N
4100N
850N
The saving rate here is
s = (Total Savings)/(Total Income) = 850N/4100N = 850/4100 = .207 or 20.7%
(b) Suppose that all growth occurs by moving people from the poor category to the middleclass
category. Will the saving rate rise over time or fall?
Answer: Let’s denote the number of people by N.
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 Fall '10
 demidova
 Economics

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