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Suppose you collect stamps and coins for the sheer fun of it.Currently, your collection contains both.For purposes of this problem, suppose that stamps all sell for one price and coins all sell for another, and both are normal goods.
a.Begin by illustrating your current budget constraint (with stamps on the horizontal and coins on the vertical) as well as the bundle A you currently own.Assume that you have done the best you can given your circumstances.
b.The stamp industry has recently marketed its product as a safe way of investing and insuring against inflation.As a result, the price of stamps has been driven up since you chose your current bundle.Show how this changes your budget constraint given that you can buy and sell both stamps and coins --- and assuming you have no additional funds to spend on your collections.
c.Are you happy about the stamp industry's marketing campaign? In what way will you adjust your collection?
d.After a while (and after you have made your desired adjustments), it turns out that the marketing campaign only produced a temporary "bubble" in the stamp market --- and prices fall back to what they were before.Are you happy when the bubble bursts? Will you have more or fewer coins and stamps than you had before the marketing campaign started?
e.True or False: For collectors that collect to satisfy their passion (rather than as an investment strategy), volatility in prices is good.
Assumed Investment Rate
A projected or hypothetical rate of return on an investment over a specified period.
Annuity Cost
The total amount of money it takes to fund an annuity, which provides a series of payments at fixed intervals.
Roth Retirement Plan
A type of retirement savings account allowing taxed contributions to grow tax-free, with withdrawals in retirement also being tax-free.
Regular Retirement Plan
A retirement savings plan that allows individuals to save and invest for retirement, typically with tax advantages or benefits.
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