
Concept explainers
a
Present value of each student’s income.
a

Answer to Problem 14.3P
The present value of income is $100,000
Explanation of Solution
Given Information:
It is known that,
Above budget constraint shows Consumption in present period and in future period is equal to total income earned.
Since,
The present value (PV) of D$ is
The Income this year is $50000.
So the present value is given below.
The income next year is $55000. Present value using this income is calculated as follows.
Therefore, the present value of income is $100,000.
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)
Condition for maximizing utility.
b)

Answer to Problem 14.3P
He must consume times of consumption this year in next year.
Explanation of Solution
Given Information:
For utility maximization, marginal rate of substitution is equal to the price ratio.
For roommate P,
The price ratio is
In equilibrium,
For utility maximization of roommate P, he must consume times of consumption this year in next year.
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)
Way to
c)

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:
Now according to the third condition, put
Similarly,
For roommate P, saving this year is $25000 and there is a dissaving of $27500 in next year.
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)
Way to
d)

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:
Here, solve for roommate G. The MRS for Glitter is
In equilibrium,
Put this in equation (1).
G borrows $25,000 in period 0 and save S $27,500 in period 1.
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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Chapter 14 Solutions
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