Assume That Andrew Marcus Is 25 Years Old and Expects

question 51

Essay

Assume that Andrew Marcus is 25 years old and expects to live to age 75.
a. If he wins $20 million in cash (after taxes) in the lottery and retires, how much will he consume each year if he wants to have constant consumption and use up all his wealth by the time he dies? Assume the real interest rate is zero.
b. If his total income in the year he wins the lottery is his lottery winnings, what will his average propensity to consume (APC) be for that year?
c. If he has no other earnings in later years but continues his constant consumption, what will his average propensity to consume be for those later years?
d. What is Andrew's "permanent income" in the year he wins the lottery? What is his "transitory income"?

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Definitions:

Commission

A fee or percentage of a sale paid to a salesperson, intermediary, or agent for their services in facilitating the transaction.

Profits

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

Payday Loan

A type of short-term borrowing where an individual borrows a small amount at a high rate of interest, typically due on their next paycheck.

Profitable Stores

Retail outlets that generate more revenue than the expenses incurred in their operation.