Shen is a tenured faculty member who teaches molecular physics at a university where he earns an annual salary of $160,000. He intends to take the next year off to focus on writing a new undergraduate physics textbook, so he will not ear any income next year. He is currently deciding how much of this year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next year. Therefore, next year Shen will consume whatever he saves this year plus interest, and he is not concerned with the future beyond The following graph shows Shen's preferences for consumption this year and next year. Suppose initially Shen cannot earn interest on the money he Use the green line (triangle symbol) to plot Shen's budget constraint (BC) on the following graph. Then use the black point (plus symbol) to show his optimum consumption bundle. Note: Dashed drop lines will automatically extend to both axes. CONSUMPTION NEXT YEAR (Thousands of co BR CONSUMPTION THIS YEAR (Thousands of dollars) Now suppose Shen can cam 50% real interest on any money he saves BC, (0%) Initial Optimum (0%) BC, (50% Inter) New Optimum (50% Interest) (?) Use the blue line (circle symbol) to plot his new budget constraint (BC) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC, think about how much money Shen would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Shen should save of his current income when he cannot carmany interest on his savings and when he can eam 50% interest on his savings Interest Rate Amount Shen Saves (Percent) (Dollars) 100,000 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? In this case, Shen saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high ●All consumers, including Shen, save less money when interest rates are high, because they don't need to save as much money to have the same future income. All consumers, including Shen, save more money when interest rates are high, because they get a higher return on that investment. In this case, Shen saves less money when interest rates are high. However, consumers with different preferences might save more money when interest rates are high

Shen is a tenured faculty member who teaches molecular physics at a university where he earns an annual salary of $160,000. He intends to take the next year off to focus on writing a new undergraduate physics textbook, so he will not ear any income next year. He is currently deciding how much of this year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next year. Therefore, next year Shen will consume whatever he saves this year plus interest, and he is not concerned with the future beyond The following graph shows Shen's preferences for consumption this year and next year. Suppose initially Shen cannot earn interest on the money he Use the green line (triangle symbol) to plot Shen's budget constraint (BC) on the following graph. Then use the black point (plus symbol) to show his optimum consumption bundle. Note: Dashed drop lines will automatically extend to both axes. CONSUMPTION NEXT YEAR (Thousands of co BR CONSUMPTION THIS YEAR (Thousands of dollars) Now suppose Shen can cam 50% real interest on any money he saves BC, (0%) Initial Optimum (0%) BC, (50% Inter) New Optimum (50% Interest) (?) Use the blue line (circle symbol) to plot his new budget constraint (BC) on the previous graph. Then use the grey point (star symbol) to plot his optimum consumption bundle at this interest rate. (Hint: To plot BC, think about how much money Shen would have next year if he saved his entire income this year.) Using the previous graph, complete the following table by indicating how much Shen should save of his current income when he cannot carmany interest on his savings and when he can eam 50% interest on his savings Interest Rate Amount Shen Saves (Percent) (Dollars) 100,000 Which of the following statements is a good description of the results of this exercise, as well as its implications for broader consumer behavior? In this case, Shen saves more money when interest rates are high. However, consumers with different preferences might save less money when interest rates are high ●All consumers, including Shen, save less money when interest rates are high, because they don't need to save as much money to have the same future income. All consumers, including Shen, save more money when interest rates are high, because they get a higher return on that investment. In this case, Shen saves less money when interest rates are high. However, consumers with different preferences might save more money when interest rates are high

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 3E

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