EBK INTERMEDIATE MICROECONOMICS AND ITS
EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
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Chapter 14, Problem 14.3P

a

To determine

Present value of each student’s income.

a

Expert Solution
Check Mark

Answer to Problem 14.3P

The present value of income is $100,000

Explanation of Solution

Given Information:

  MRSforP=C1/3C0

  MRSforG=3C1/C0

It is known that,

  (1+r)C0+C1=(1+r)Y0+Y1

Above budget constraint shows Consumption in present period and in future period is equal to total income earned.

Since, r=0.1

  1.1C0+C1=1.1(50000)+55000

  =55000+55000

  =110000......(1)

The present value (PV) of D$ is D(1+r)

The Income this year is $50000.

So the present value is given below.

  50000(1+0)=50000

The income next year is $55000. Present value using this income is calculated as follows.

  55000(1+0.1)=50000

Therefore, the present value of income is $100,000.

Economics Concept Introduction

Introduction:

Present discounted value means an amount to be paid or invested today to get regular income in future. It is usually done to know the real interest rate in an economy for the investment done.

b)

To determine

Condition for maximizing utility.

b)

Expert Solution
Check Mark

Answer to Problem 14.3P

He must consume times of consumption this year in next year.

Explanation of Solution

Given Information:

  MRSforP=C1/3C0

  MRSforG=3C1/C0

For utility maximization, marginal rate of substitution is equal to the price ratio.

For roommate P,

  MRS=C13C0

The price ratio is 1+r

In equilibrium,

  C13C0=1+r

  C13C0=1.1

  C1=3.3C0

For utility maximization of roommate P, he must consume times of consumption this year in next year.

Economics Concept Introduction

Introduction:

Utility is the satisfaction dervied from consumption of good or services. To calculate satisfactifaction, it is given numeric form called utils. Util is the unit to measure utility. More the utils, more is the utility derived.

c)

To determine

Way to C1 and C0 choose to get maximum utility and amount to be borrowed or saved by P.

c)

Expert Solution
Check Mark

Answer to Problem 14.3P

saving this (present) year is $25000 and there is a dissaving of $27500 in next year.

Explanation of Solution

Given Information:

  MRSforP=C1/3C0

  MRSforG=3C1/C0

Now according to the third condition, put C1=3.3C0 in equation (1),

  1.1C0+3.3C0=110000

  4.4C0=110000C0=25000C1=3.3(25000)=82500

  Saving in period 0(this year) = Income this year - Consumption this year

Similarly,

  S1=Y1C1

  S1=5500082500

  =27500

For roommate P, saving this year is $25000 and there is a dissaving of $27500 in next year.

Economics Concept Introduction

Introduction:

Present discounted value means an amount to be paid or invested today to get regular income in future. It is usually done to know the real interest rate in an economy for the investment done.

d)

To determine

Way to C1 and C0 choose to get maximum utility and amount to be borrowed or saved by G.

d)

Expert Solution
Check Mark

Answer to Problem 14.3P

G borrows $25,000 in period 0 and save S $27,500 in period 1.

Explanation of Solution

Given Information:

  MRSforP=C1/3C0

  MRSforG=3C1/C0

Here, solve for roommate G. The MRS for Glitter is 3C1C0 .

In equilibrium,

  MRS=1+rMRS=1.1

  3C1C0=1.1

  C0=(3011)C1

Put this in equation (1).

  3C1+C1=110000

  4C1=110000C1=27500C0=( 30 11)27500=75000

  S0=Y0Y1S0=5000075000=25000

  S1=Y1C1=5500027500=27500

G borrows $25,000 in period 0 and save S $27,500 in period 1.

Economics Concept Introduction

Introduction:

Present discounted value means an amount to be paid or invested today to get regular income in future. It is usually done to know the real interest rate in an economy for the investment done.

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