Consider a model in which an individual lives only two periods. The individual has diminishing marginal utility of consumption and receives an income of RM100,000 in the first period and an income RM6,000 in the second period. The private interest rate is 10 percent for each period, in which the individual can borrow or lend money at this rate. Assume also that the individual intends to consume all of her income overs his lifetime. i) ii) If there is no Social Security program, what is the individual's optimal consumption in each period? Assume that there is a Social Security program that takes RM6,000 from the individual in the first period and pays her this amount with interest in the second period. What is the impact of this system on the individual's saving?
Consider a model in which an individual lives only two periods. The individual has diminishing marginal utility of consumption and receives an income of RM100,000 in the first period and an income RM6,000 in the second period. The private interest rate is 10 percent for each period, in which the individual can borrow or lend money at this rate. Assume also that the individual intends to consume all of her income overs his lifetime. i) ii) If there is no Social Security program, what is the individual's optimal consumption in each period? Assume that there is a Social Security program that takes RM6,000 from the individual in the first period and pays her this amount with interest in the second period. What is the impact of this system on the individual's saving?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider a model in which an individual lives only two periods. The individual has diminishing marginal
utility of consumption and receives an income of RM100,000 in the first period and an income RM6,000
in the second period. The private interest rate is 10 percent for each period, in which the individual can
borrow or lend money at this rate. Assume also that the individual intends to consume all of her income
overs his lifetime.
i)
ii)
If there is no Social Security program, what is the individual's optimal consumption in each
period?
Assume that there is a Social Security program that takes RM6,000 from the individual in the
first period and pays her this amount with interest in the second period. What is the impact
of this system on the individual's saving?
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