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**Unformatted text preview: **2. Suppose that Samuel Richardson a consumer earns $50,000 this year but only $10,000 next year. Think of this year as his working life and next year as retirement. a) If the interest rate is 10%, what is the present value of his income next year? b) Write the general formula for present value of $x earned one year from now. Write the formula for present value of $x earned 5 years from now. c) Draw the Samuel’s budget constraint for consumption today and consumption tomorrow. d) What happens to the budget constraint if the interest rate drops to 5%? Draw the new budget constraint on the graph and explain. e) Suppose that Samuel Richardson prefers to consume exactly the same amount this year and next year (in retirement). Draw his indifference curves (on the graph above). f) How much should Samuel Richardson save for retirement? Show your answer on the graph and derive it mathematically....

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- Summer '11
- BrianPhelan
- Economics, Microeconomics, Cost curve, Samuel Richardson, fleece pullovers