Assume that Andrew Marcus is 25 years old and expects to live to age 75.
(a) If he wins $20 million in cash (after taxes) in the lottery and retires, how much will he consume each year if he wants to have constant consumption and use up all his wealth by the time he dies? Assume the real interest rate is zero.
(b) If his total income in the year he wins the lottery is his lottery winnings, what will his average propensity to consume (APC) be for that year?
(c) If he has no other earnings in later years but continues his constant consumption, what will his average propensity to consume be for those later years?
(d) What is Andrew's “permanent income” in the year he wins the lottery? What is his “transitory income”?
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