Scenario 21-3 Scott Knows That He Will Ultimately Face Retirement. Assume That

question 55

Multiple Choice

Scenario 21-3
Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which he works and earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his working period and nothing in his retirement period. He must both save and consume in his work period with an interest rate of 10 percent on savings.
-Refer to Scenario 21-3. If the interest rate on savings increases,

• A)Scott will decrease his savings in the work period if the income effect is greater than the substitution effect for him.
• B)Scott will increase his savings in the work period if the income effect is greater than the substitution effect for him.
• C)Scott will increase his savings in the work period if the substitution effect is greater than the income effect for him.
• D)Both a and c are correct.

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Definitions:

Minimization Problem

A type of optimization problem where the objective is to find the minimum value of a function subject to certain constraints.

Objective Function

A mathematical expression representing the goal of an optimization problem, typically to maximize or minimize certain values.

Profit

The financial gain obtained when the revenue generated from business activities exceeds the expenses, costs, and taxes involved in sustaining the activity.

Objective Function

A mathematical function used in decision-making, optimization, or problem-solving that specifies the objective to be maximized or minimized.