# Answer to Question #72042 in Microeconomics for Izzy

Question #72042

An individual inherited wealth of$150 and he has a current income in period one of $350. The future income in period two is $270 and he leaves a bequest of $50 to his children. It saves $100 in period one. The interest rate is 10%.

a)Derive the equation of the individualâ€™s inter-temporal budget constraint.

b)Find his consumption in period one and in period two.

c)Graph the individualâ€™s budget line and show his equilibrium point.

d)Consider the original case of an interest rate at 10%. Discuss and show graphically what the equilibrium could be if the individual had received a higher inheritance.

e)Consider the original case of an interest rate at 10%. Discuss and show graphically now what the equilibrium of this individual could have been if the he had NOT received any inheritance but had borrowed $50 during the first period, and had received a future income of $435, still leaving a bequest of $50.Link your finding to the predictions of the Permanent Income Hypothesis theory.

a)Derive the equation of the individualâ€™s inter-temporal budget constraint.

b)Find his consumption in period one and in period two.

c)Graph the individualâ€™s budget line and show his equilibrium point.

d)Consider the original case of an interest rate at 10%. Discuss and show graphically what the equilibrium could be if the individual had received a higher inheritance.

e)Consider the original case of an interest rate at 10%. Discuss and show graphically now what the equilibrium of this individual could have been if the he had NOT received any inheritance but had borrowed $50 during the first period, and had received a future income of $435, still leaving a bequest of $50.Link your finding to the predictions of the Permanent Income Hypothesis theory.

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