QUESTIONS FOR DISCUSSION

465

5. Estimate your income, consumption, and saving- for last year. If you dissaved (consumed more than your income), how did you finance your dissaving? Estimate the composition of your consumption in terms of each of the major categories listed in Table 22-1. 6. "Along the consumption function, income changes more than consumption." What docs this imply for the MPCand MPS? 7. "Changes in disposable income lead to movements along the consumption function; changes in wealth or other factors lead to a shih of the consumption fUIICtion." Explain this statement with an illustration of

8.

What would be the effects of the following on the investment demand function illustrated in Table 22-!1 and Figure 22-10? a. A doubling of the annual revenues per $1000 invested shown in column (3) b. A rise in interest rates to 15 percent per year c. The addition-of a ninth project with data in the first three columns of (.J, 10, 70) d. A 50 percent t;IX on net profits shown in columns (li) and (7) 9. Using the augmcnted invcxuncnt dcmnnd schednk Irom question H(c) and ;lssulTling that the interest rate is 10 percellt, calculate the level of investment for cases a through d in question 8.

each ~ase:

Ill. Advanced problem: According- to the life-cycle model, people consume each year an amount that depends upon their lifetime income rather than upon their current income. Assume that you expect to receive future income (in constant dollars) according to the schedule ill Table 22-G. 2. Assume that there is no interest paid on savings, You have no initial savings. Further assume that you want to "smooth" your consumption (enjoying equal consumption each year) because of diminishing- extra satisfaction from extra consumption. Derive yom best consumption trajectory for the 5 years, and write the figures in column (3). Then calculate your saving and enter the amounts in column (4); put your end-of-period wealth, or cumulative saving, for cach year into column (5). What is your average saving rate in the first 4 years? b. Next, assume that a government social security program taxes you $2000 in each of your working years and provides you with an $8000 pension in ycar 5. If you still desire to smooth consumption, calculate your revised saving plan. How has the social security progr;ull afkCled your consumption? What is the efli.'u on your average, sowing rate ill the lirst ,1 yell's) Can you see why some economists claim t h.u social security Gin lower saving?

(1)

(2)
Income

(3)

(4 )

(5 )

Consumption

Saving

Cumulative saving (end of year)

Year
1

($)
30,000

($)

($)

($)

2
3
4 5*
*Relired.

30,000 25,000 15,000 ' 0

TABLE 22-6.