Suppose we have Dagwood, who has a current income of $200K and expected future income of $100K.
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Question:
Suppose we have Dagwood, who has a current income of $200K and expected future income of $100K. He has $100K in current wealth but this is before he opens that #$@% envelope. He has zero expected future wealth.
Dagwood's behavior is consistent with the life-cycle theory of consumption. For one, he perfectly smooths consumption and two, since he is in his peak earning years; he is saving now so that he can maintain his current level of consumption in the future.
Given that Dagwood faces a real interest rate of 0.05, answer the following questions.
- Calculate Dagwood's optimal consumption bundle showing all work. Note, for all C* calculations, round down to one decimal point.
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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