ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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**1. Consumption, Classical and Keynesian** Consider The Consumption Theory we discussed in class when there are MANY periods (say, a person who is going to live for 70 years). Imagine that this person does not care about his or her children. This is what we called the Life Cycle Hypothesis. - **(i)** How many bonds will this person leave when he dies? - **(ii)** What is his lifetime Intertemporal budget constraint? - **(iii)** What is the marginal propensity to consume out of temporary income? What does it depend on? - **(iv)** What is the marginal propensity to consume out of permanent income? Does it depend on the same factors you mentioned in the previous question? Imagine that this person actually cares for his or her children in the sense that his utility function includes the utility of his children. - **(v)** How many bonds will this person leave when he dies? Is your answer different from (i)? If so, why? - **(vi)** What is the marginal propensity to consume out of temporary income? Is it the same as in (ii)? If it is not, explain why. - **(vii)** What is the marginal propensity to consume out of permanent income? Is it the same as in (ii)? If it is not, explain why. Consider the Keynesian Liquidity Constrained consumer (LCC). - **(viii)** What is the marginal propensity to consume out of temporary income? What does it depend on? - **(ix)** What is the marginal propensity to consume out of permanent income? Does it depend on the same factors you mentioned in the previous question?
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Transcribed Image Text:**1. Consumption, Classical and Keynesian** Consider The Consumption Theory we discussed in class when there are MANY periods (say, a person who is going to live for 70 years). Imagine that this person does not care about his or her children. This is what we called the Life Cycle Hypothesis. - **(i)** How many bonds will this person leave when he dies? - **(ii)** What is his lifetime Intertemporal budget constraint? - **(iii)** What is the marginal propensity to consume out of temporary income? What does it depend on? - **(iv)** What is the marginal propensity to consume out of permanent income? Does it depend on the same factors you mentioned in the previous question? Imagine that this person actually cares for his or her children in the sense that his utility function includes the utility of his children. - **(v)** How many bonds will this person leave when he dies? Is your answer different from (i)? If so, why? - **(vi)** What is the marginal propensity to consume out of temporary income? Is it the same as in (ii)? If it is not, explain why. - **(vii)** What is the marginal propensity to consume out of permanent income? Is it the same as in (ii)? If it is not, explain why. Consider the Keynesian Liquidity Constrained consumer (LCC). - **(viii)** What is the marginal propensity to consume out of temporary income? What does it depend on? - **(ix)** What is the marginal propensity to consume out of permanent income? Does it depend on the same factors you mentioned in the previous question?
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