Question
Suppose Jane will live for 5 periods. Make the following assumptions: She follows the life-cycle hypothesis (she smooths consumption across periods as much as possible).
Suppose Jane will live for 5 periods. Make the following assumptions: She follows the life-cycle hypothesis (she smooths consumption across periods as much as possible). The interest rate is zero for borrowing and saving There is no uncertainty with regard to Janes life-span or income She begins life with no wealth. She does not want to leave a bequest (her wealth should not be positive when she dies. She can borrow money (negative savings), but she cannot end her life with debt (negative wealth). This is her income for each period: Period 1: $20,000 Period 2: $60,000 Period 3: $120,000 Period 4: $0 Period 5: $0 a. Compute her consumption and savings for each period. b. Compute her wealth at the beginning of each period including period six. c. Suppose that she wins an additional $25,000 from a lottery in period 1. How much does consumption and savings in period 1 increase as a result? Explain what Jane is doing with her winnings. 4 Now suppose that Jane is not allowed to borrow (wealth can never be negative) d. Compute her consumption and savings for each period. e. Compute her wealth at the beginning of each period including period six. f. Suppose that she wins an additional $25,000 from a lottery in period 1. How much does consumption and savings in period 1 increase as a result? Explain what Jane is doing with her winnings. How is this result different from when she was allowed to borrow?
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