Janet Knows That She Will Ultimately Face Retirement

question 58

Essay

Janet knows that she will ultimately face retirement.Assume that Janet will experience two periods in her life,one in which she works and earns income and one in which she is retired and earns no income.Janet can earn $250,000 during her working period and nothing in her retirement period.She must both save and consume in her work period and can earn 10 percent interest on her savings.
a.Use a graph to demonstrate Janet's budget constraint.
b.On your graph,show Janet at an optimal level of consumption in the work period of $150,000.What is the implied optimal level of consumption in her retirement period
c.Now,using your graph from part b,demonstrate how Janet will be affected by an increase in the interest rate on savings to 15 percent.Discuss the role of income and substitution effects in determining whether Janet will increase or decrease her savings in the work period.

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Definitions:

Validity

A property of logical or analytical statements where the conclusion logically follows from the premises.

Unstated Premise

An implicit assumption or belief that is not explicitly expressed but is necessary for an argument's conclusion to hold.

Enthymeme

An argument in which a premise or conclusion is not explicitly stated but rather implied.

Validity

In logic, the characteristic of an argument or statement where it is impossible for the premises to be true and the conclusion false.