Mark\'s annual after tax income earnings are $50,000. His $40,000, 3-year CD is
ID: 1139265 • Letter: M
Question
Mark's annual after tax income earnings are $50,000. His $40,000, 3-year CD is maturing in the near future and he is planning to spend the interest on a 6 week holiday after that. His investments can earn a total of 10% before he starts his trip. If Mark's "present consumption" is the time he spends working and his "future consumption" is his trip, his optimal choice from the table below is to: spend $50,000 now and consume nothing in the future spend nothing now and consume $77,000 in the future spend $10,000 now and consume $44,000 in the future. spend $20,000 now and consume $33,000 in the futureExplanation / Answer
Present Consumption Total utility from Present Consumption Marginal Utility per dollar from present Consumption Future Consumption Total Utility from Future Consumption Marginal Utility per dollar from present Consumption 0 0 0 0 10000 600 0.06 11000 3000 0.27 20000 1100 0.03 22000 4000 0.05 30000 1500 0.01 33000 4800 0.02 40000 1800 0.01 44000 5400 0.01 50000 2000 0.00 55000 5800 0.01 60000 2100 0.00 66000 6000 0.00 77000 6100 0.00 * So he will consume where Marginal utility er dollar from present consumption >= Margianl utility per dollar from future consumption. Therefore he will consume 20000 in present consumption and 33000 in future consumption. Therefore the correct answer is D)