Question 4 (20 marks)

Assume that Nicole is 28 years old, plans to retire at age 55, and expects to live to the ripe old age of 75. Her labor income as an accountant is $180,000 per year, and she intend to maintain a constant level of real consumption spending for the remainder of her life. Assuming no growth in real labor income, the complete absence of taxes, and a real interest rate of 3% per annum.

1. Compute the value of Nicoles human capital. Draw a relevant timeline to indicate the situation, and then interpret the answers in your own words. [10marks]
2. Compute the level of Nicoles permanent income. Draw a relevant timeline to indicate the situation, and then interpret the answers in your own words. [10marks]