1. A consumer is making saving plans for this year and next. She knows that her real income after taxes will be $50,000 in both years. Any part of her income saved this year will earn a real interest rate of 10°/o between this year and next year. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). There is no uncertainty about the future. The consumer wants to save an amount this year that will allow her to (1) make college tuition payments next year equal to $12,600 in real terms; (2) enjoy exactly the same amount of consumption this year and next year, not counting tuition payments as part of next year's consumption; and (3) have neither assets nor debts at the end of next year.

a. How much should the consumer save this year? How much should she consume?

How are the amounts that the consumer should save and consume affected by each of the following changes (taken one at a time, with other variables held at their original values)?

b. Her current income rises from $50,000 to $54,200.

c. The income she expects to receive next year rises from $50,000 to $54,200.

d. During the current year she receives an inheritance of $1050 (an increase in wealth, not income).

e. The expected tuition payment for next year rises from $12,600 to $14,700 in real terms. f The real interest rate rises from 10°/o to 25°/o.

Number of Fabricators 0 1 2 3 4 5 6 Number of Hoops Produced per Year 0 100 150 180 195 205 210 Hula hoops have a real value of $1 each. HHHHC has no other costs besides the cost of fabricators.

a. Find the expected future marginal product of capital (in terms of dollars) for each level of capital. The MPKf for the third fabricator, for example, is the real value of the extra output obtained when the third fabricator is added.

b. If the real interest rate is 12°/o per year and the depreciation rate of capital is 20°/o per year, find the user cost of capital (in dollars per fabricator per year). How many fabricators should HHHHC buy?

c. Repeat Part

(b) for a real interest rate of 8°/o per year.

d. Repeat Part

(b) for a 40°/o tax on HHHHC's sales revenues.

e. A technical innovation doubles the number of hoops a fabricator can produce. How many fabricators should HHHHC buy when the real interest rate is 12°/o per year? 8°/o per year? Assume that there are no taxes and that the depreciation rate is still 20°/o per year