In the discussion of the life-cycle hypothesis, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes. How does this growth in income influence the lifetime pattern of consumption and wealth accumulation shown in Figure 17-12 under the following conditions?Consumers can borrow, so their wealth can be negative.Consumers face borrowing constraints that prevent their wealth from falling below zero. Do you consider case (a) or case (b) to be more realistic? Why? FIGURE 17-12$IncomeWealthSavingConsumptionRetirementbeginsDissavingEndof lifeConsumption, Income, and WealthOver the Life Cycle If the consumersmooths consumption over her life (asindicated by the horizontal consump-tion line), she will save and accumulatewealth during her working years andthen dissave and run down her wealthduring retirement.

The life cycle hypothesis of consumption is an economic theory that proposes that individuals base…

Answered: In the discussion of the life-cycle…

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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In the discussion of the life-cycle hypothesis, income is assumed to be constant during the period before retirement. For most people, however, income grows over their lifetimes. How does this growth in income influence the lifetime pattern of consumption and wealth accumulation shown in Figure 17-12 under the following conditions?

Consumers can borrow, so their wealth can be negative.
Consumers face borrowing constraints that prevent their wealth from falling below zero. Do you consider case (a) or case (b) to be more realistic? Why?

FIGURE 17-12
$
Income
Wealth
Saving
Consumption
Retirement
begins
Dissaving
End
of life
Consumption, Income, and Wealth
Over the Life Cycle If the consumer
smooths consumption over her life (as
indicated by the horizontal consump-
tion line), she will save and accumulate
wealth during her working years and
then dissave and run down her wealth
during retirement.

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