
How to ensure smooth consumption.

Explanation of Solution
If people want to smooth their consumption over time, they tend to reduce the current consumption and save more. According to the consumption – smoothing theory, people who have fluctuations in income, save most of their income in the good years and use it during the bad times in order to maintain a smooth consumption pattern. When people receive an unexpected winning as a lottery, they tend to postpone their consumption from periods of high income to low income to obtain more stability and predictability. They may also spend money for consuming durable goods like houses or cars which represent spending over time.
Concept introduction:
Consumption: Consumption is defined as the act of utilising the total or partly income to meet the needs in a given period of time.
Savings: Savings is defined as the part of income that is not consumed in the current period.
Consumption smoothing: Consumption smoothing is the economic concept which refers to the desire of people to have a stable consumption pattern.
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Chapter 9 Solutions
EBK MODERN PRINCIPLES OF MICROECONOMICS
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