Question

I am not understanding this question, please explain. thank you!

84%E) 8:39 PM Wed Oct 30 5) Assume interest rates equal 10% and there is a decrease in current income of $1000, and an increase in future income of $1100, it will lead to A) an increase in current consumption, a decrease in future consumption, and an increase in saving B) a decrease in current consumption, an increase in future consumption, and a decrease in saving. C) no change in current consumption, future consumption or saving D) a decrease in current consumption, a decrease in future consumption, and a decrease in saving E) no change in current consumption or future consumption but savings decreases. E Chapter 5 questions 6) If the consumer is originally consuming where MRT< MRS, a move to a Pareto optimal equilibrium will lead to A Leisure falls and consumption rises B) Leisure rises and consumption increases C) Leisure rises and consumption falls D) Leisure falls and consumption falls E Labour supplied falls and consumption rises

Answer 1

5. Correct option: E

Reason: PV of current income = 100

PV of future income = 110/1.1 = 100

This means they are equal

If current income decreases, current saving both will fall

However, consumption would remain unchanged in both periods because present value of both incomes is same and any fall in income today is compensated by increase in income in future