Question

Ms. Newcastle has $60,000 income this year and $40,000 next year. The market interest rate is 10 percent per year. Suppose Ms. Newcastle wishes to consume $62,000 next year. What will be her consumption this year?

Answer 1

Answer:

Consumption this year=$40,000

Explanation:

Given Data:

Income this year= $60,000

Income Next year= $40,000

Market Interest Rate= 10% per year

Consumption next year=$62,000

Required:

Consumption this year=?

Solution:

Difference in amount for next year= Consumption next year-Income Next year

Difference in amount for next year=$62,000- $40,000

Difference in amount for next year=$22,000

This is the more amount which is required to spend $62,000 next year.

Consumption this year=$Income\ this\ year-\frac{Difference\ in\ amount\ for\ next\ year}{1+Market\ interest\ rate}$

$Consumption\ this\ year=\ 60,000-\frac{\ 22,000}{1+0.1}\\Consumption\ this\ year=\ 40,000$

Consumption this year=$40,000