Suppose an Individual Has a Fixed Amount of Wealth to Allocate

question 15

Multiple Choice

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (C₁ and C₂) .Any funds not spent in period 1 will earn interest (at the rate r) ,which will increase purchasing power in period 2.Consider four possible reactions to an increase in r: Which of these is consistent with the hypothesis that both C₁ and C₂ are normal goods?

• A) II and III, but not I and IV.
• B) I, II, and IV, but not III.
• C) I, III, and IV, but not II.
• D) I, II and III, but not IV.

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Definitions:

Formal Agreement

A legally binding contract or arrangement between two or more parties that is documented and enforceable by law.

High Trust

Refers to the confidence in the reliability, integrity, and abilities of a person, organization, or system.

Take Risks

The action of engaging in activities that carry a potential for failure, but also for significant reward or positive outcome.

Disengaged

A state where an individual is detached or disconnected from their work or activities, often leading to a lack of motivation or interest.