1. The text implies that the ratio of consumption to accumulated saving declines over time until retirement.

a. Why? What assumption about consumption behavior leads to this result?

b. What happens to this ratio after retirement?

2. a. Suppose you earn just as much as your neighbor but are in much better health and expect to live longer than she does. Would you consume more or less than she does? Why? Derive your answer using the equation from the text, C= (WL/NL) x YL

b. According to life cycle hypothesis, what would be the effect of the social security system on your average propensity to consume out of (disposable) income? Is the credibility of the social security system an issue here?

3. In terms of the permanent-income hypothesis, would you consume more of your Christmas bonus if (a) you knew there would be a bonus every year, or (b) this was the only year the bonus would b e given?

4. Explain why successful gamblers might be expected to live very well even in years when they don't do well at all.

5. The United Sates, during the 1980s found its rate of personal saving to be particularly low. It also, during that time, had demographic blip the baby-boomer generation, then in its late 20s to early 30s.

a. Does the life-cycle hypothesis suggest a reason that these two facts might be connected?

b. What does the hypothesis suggest we should see as this generation ages?