Q4-Q5 Problem 4: Consumption and SavingChristina is a young worker who wants to plan for her retirement early in life. Suppose that she receivesan inheritance of $50,000. When she is young, her earnings from working is $60,000 and when old, shecarns no labor income – she is retired. Furthermore, suppose that she can put her savings into an IRAwith a rate of return of 30%.1. Derive Christina's budget constraint when young and when old as well as her intertemporalbudget constraint.2. Plot Christina's intertemporal budget line – use the x-axis for consumption when young. What isthe slope of her budget line? What is the highest level of consumption that she can achieve whenyoung? What is the highest level of consumption that she can achieve when she is old?3. Suppose (only for this part) that she likes to equate consumption when young and old. Whatwould be her consumption level when young and old? How much would she save for retirementto achieve this?4. Suppose that her utility function is given by log e + B log efand 8 = 0.9. What is the level ofconsumption when young and old that maximize her utility? How much would she save forretirement to achieve this? Hint: use the derivation done during the lecture to calculate theoptimal level of consumption when young and old.5. The U.S. government is concerned about the well-being of retired individuals. A program is putin place that imposes a lump-sum tax of $10,000 on Christina when she is working and providesa social security benefit of $10,000 when she is old. How does this change Christina's budgetline (assume that the interest rate does not change)? What happens to her optimal level ofconsumption when young and old compared to when there are no taxes and no benefits (part 5)?What about saving?

"consumption" refers to the portion of Christina's earnings that she spends on items and offerings…

Answered: Consumption and Saving

Business

Economics

Consumption and Saving

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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