An individual has $17000 income in period 0 and $60,000 income in period 1. If the individual desires to consume $30,000 in period 1, what is the maximum consumption in period 0 assuming the interest rate is 6%?
I can't find a formula to solve this question!!
You should need a formula for this.
Based upon the information you have provided, all of the income of period 0 ($17,000) can be consumed then, and there will still be enough income in period 1 to consume $30,000 at that time, since the individual earns much more than $30,000 then. This assumes that the $30,000 expenditures are not all made at the beginning of period 1.
Are you assuming that a loan is taken out at 6% during period 0 that has to be paid back at the end of period 1? In that case, more than $17,000 can be taken out in period 0. How much can be spent depends upon when it is taken out during that period, and when it is paid back.
I meant to write at the beginning "You should NOT need a formula for this". But if a loan is taken out during period zero, then you do need a formula, but you need additional information as well. (See last paragraph above).
Thats all the info that was provided, It's an assignment and I am finding some of these questions ambiguous. Here's two more that are similar:
(1)Cindy has income of $12000 in year 0.
Calculate her income in year 1 if she wants to consume $26,000 in year 0 and $14,000 in year 1. Assume the interest rate is 4% per year.
(2)Jonathan has income of 45000 in period 0 and 65000 in period 1. An investment opportunity that costs $30000 in period 0 is worth $32000 in period 1. What is the maximum possible consumption in period 0 if Jonathan consumes $70000 in period 1 when the market rate of interest in 4%?
Hey is it the assignment for Shiller for ADM 2413 , i am stuck on this as well, i think the constraint is to take out a maximum loan at per 0 which should all be paid back at per 1. so we cannot take out more loan at per 0 at 6% than can be paid by per 1's income which is 30000 after the 30000 consumption.
The guy wants to consume 30,000 in t=1, but has y=60,000. So, he could in t0, borrow amount L. Since he will need to pay interest, at 6%, on the borrowed amount. So he wants L*(1+.06) = 30000. Solve for L. -- this being the additional consumption in t0.
To answer this question, we need to understand the concept of present value and future value. The present value (PV) is the current value of a future amount of money, and the future value (FV) is the value that a sum of money will grow to at some point in the future.
In this scenario, we have the income in two periods: period 0 and period 1. The individual desires to consume $30,000 in period 1, which means they need $30,000 in the future. The interest rate is given as 6%.
To calculate the maximum consumption in period 0, we need to find the present value of the desired consumption in period 1.
Step 1: Calculate the future value (FV) of the desired consumption in period 1.
FV = $30,000
Step 2: Calculate the present value (PV) of the future value (FV) using the interest rate.
PV = FV / (1 + r)^n
where r is the interest rate and n is the number of periods.
In this case, we only have one period, so n = 1.
PV = $30,000 / (1 + 0.06)^1
PV = $30,000 / (1.06)
PV ≈ $28,301.89
Therefore, the maximum consumption in period 0 is approximately $28,301.89.