Suppose You Know I Am Only About Consumption This Year

question 14

Essay

Suppose you know I am only about consumption this year and consumption next year.Suppose also that I have an income this year but do not expect to have an income next year.Explain your answers.​
a.You notice that I save more after the interest rate falls.Can you tell whether "consumption now" is a normal, inferior or Giffen good?
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b.Suppose I also received an unexpected raise at work and you overhear me say: "Cool, I am even Steven.Now that I have my raise, I am just as happy as I was before the interest rate fell and I did not yet have a raise." Without knowing anything more, can you tell whether I consume more or less next year than I would have consumed had neither of the two changes happened?

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Definitions:

Systematic Errors

Suboptimal choices that (1) are not rational because they do not maximize a person’s chances of achieving his or her goals and (2) occur routinely, repeatedly, and predictably.

Self-Interested

Acting in a way that is most beneficial to oneself, often used in the context of economic behavior assuming individuals act to maximize their own welfare.

Willpower

The ability to resist short-term temptations in order to meet long-term goals.

Systematic Error

Errors in measurement that are consistent, predictable, and typically caused by faulty equipment or bias, which can lead to inaccuracies in data collection or analysis.