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Antonio is a tenured faculty member who teaches electromagnetism at a university where he earns an annual salary of $160,000. He intends to take the
Antonio is a tenured faculty member who teaches electromagnetism at a university where he earns an annual salary of $160,000. He intends to take the next year off to focus on writing a new undergraduate physics textbook, so he will not earn any income next year. He is currently deciding how much of this year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next year. Therefore, next year Antonio will consume whatever he saves this year plus interest, and he is not concerned with the future beyond next year. The following graph shows Antonio's preferences for consumption this year and next year. Suppose initially Antonio cannot earn interest on the money he saves. Use the green line (triangle symbol) to plot Antonio's budget constraint (BC1 ) on the following graph. Then use the black point (plus symbol) to show his optimum consumption bundle. Note: Dashed drop lines will automatically extend to both axes. Note: Dashed drop lines will automatically extend to both axes. 240 N N O 200 180 160 140 120 100 CONSUMPTION NEXT YEAR (Thousands of dollars) '8 B 8 8 O 0 | I | I | | I | I | I | 20 40 60 80 100 120 140 160 180 200 220 240 CONSUMPTION THIS YEAR (Thousands of dollars) A BC 1 (0% Interest) ' 1' Initial Optimum (0% Interest) 0 302 (50% Interest) at New Optimum (50% Interest) Using the previous graph, complete the following table by indicating how much Antonio should save of his current income when he cannot earn any interest on his savings and when he can earn 50% interest on his savings. Interest Rate Amount Antonio Saves (Percent) (Dollars) o E so l:l Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? O In this case, Antonio saves less money when interest rates are high. However, consumers with different preferences might save more money when interest rates are high. Q In this case, Antonio saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high. Q All consumers, including Antonio, save less money when interest rates are high, because they don't need to save as much money to have the same future income. 0 All consumers, including Antonio, save more money when interest rates are high, because they get a higher return on that investment
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