Suppose You Know I Are Only About Consumption This Year

question 12

Essay

Suppose you know I are 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?
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:

Market Price

The current price at which an asset or service can be bought or sold in the open market.

Differentiated Products

Products distinguished from similar products by characteristics like quality, design, location, and method of promotion.

Variable Costs

Costs that change in proportion to the goods or services that a business produces, such as materials and labor.

Total Cost

The costs, both explicit and implicit, of all the resources used by the firm. Total cost includes a normal rate of return for the firm’s equity capital.