Consider the two-period model of consumption behavior, with yi = 60, ai = 10, y =

31.8and r = 6%.

A.(4 points) What is the present value of the consumer's lifetime resources (PVLR)?

B.(10 points) Suppose y increase form 60 to 70. What is the consumer's PVLR

now? Show graphically the effect of this change on consumption in both periods. Be sure to indicate by how much the budget line shifts.

C.(10 points) Suppose yt increases from 31.8 to 47.7. (yi is at its original value

of 60.) What is the consumer's PVLR now? Show graphically the effect of this change on consumption in both periods. Be sure to indicate by how much the budget line shifts.

D.(10 points) Which income increase, the one in part B or the one in part C,results in a bigger increase in current consumption (ci)? Which one results in a bigger increase in future consumption (cz)? Which one results in a bigger increase in saving (s = y ci)? Briefly explain.

E.(16 points) The one-period income increase described in part B could be considered a temporary income increase. Now suppose that income permanently increases by 10 units a period, so that yi increases form 60 to 70 and y increases from 31.8 to 41.8. What is the consumer's PVLRnow? Which income increase, the temporary one described in part B or the permanent one described here, results in a bigger increase in current consumption? Which one results in a bigger increase in future consumption? Which one results in a bigger increase in saving? Briefly explain.