Finance

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!!

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  1. 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.

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  2. 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).

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  3. 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%?

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  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.

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  5. 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.

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