Marco's Suboptimal Choice of Consuming His Entire Endowment
While Marco has the option to consume his entire $100 endowment immediately, this is generally not his best course of action. His motivation to smooth consumption over time, given he has no future income, means he prefers to transfer some of his present wealth to the future.
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CORE Econ
Economics
Social Science
Empirical Science
Science
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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Marco's Simple Saving Method: Storing Cash
Figure 9.7: Marco's Optimal Choice When Storing Cash
Activity: Constructing Marco's Feasible Frontier
Marco's Investment Opportunity in Grain
The Cost of Storing Grain due to Depreciation
Figure 9.12: Marco's Four Financial Schemes and Feasible Frontiers
An individual receives a one-time payment of $100 today and expects no income in the next period. Their main preference is to avoid large fluctuations in their spending, aiming for a relatively stable level of consumption across both periods. Given this preference, which of the following strategies is the most logical for them to adopt?
Evaluating a Consumption Choice
Evaluating Intertemporal Spending Plans
Consider an individual who receives a one-time income of $100 today and expects no income in the future. If this individual decides to save half of their income for the future, it necessarily means they place a higher value on future consumption than on present consumption.
Advising on a Financial Windfall
An individual has $100 available to spend today and expects to have no income in the future. They have a preference for maintaining a relatively stable level of consumption over time, rather than spending a lot in one period and very little in another. This preference can be represented by indifference curves that are bowed-in towards the origin on a graph plotting 'consumption today' versus 'consumption in the future'.
If the only way for this individual to save is to store the cash, creating a 1-for-1 trade-off between spending today and spending in the future, which of the following best describes their optimal consumption choice?
An individual receives a one-time financial windfall of $10,000 and anticipates having no other source of income for the current period or the next. This person's primary goal is to achieve the highest possible overall satisfaction from their consumption across both periods. They decide to spend the entire $10,000 in the current period. From an economic standpoint, why is this decision likely to be suboptimal?
Analyzing Intertemporal Consumption Choices
An individual receives a one-time endowment of $100 today and expects no income in the future. They can save simply by storing cash, meaning $1 saved today becomes $1 available in the future. Their goal is to maximize their total satisfaction across both periods, and they have a preference for smoothing their consumption. Match each potential consumption plan with the most accurate economic description of that choice.
The Rationale for Saving
Explaining Disparate Outcomes: The Impact of Situational Differences on Identical Preferences
Marco's Suboptimal Choice of Consuming His Entire Endowment
Assumptions for the Storing Cash Model: No Theft and Zero Inflation
Lending as a Saving Strategy for Marco
Learn After
Evaluating the Likelihood of Successful Collusion
An individual receives a one-time payment of $5,000, which is their only source of funds for both the current period and the next. If this individual's goal is to maintain a relatively stable level of well-being across both periods, why is spending the entire $5,000 in the current period likely not their best option?
Evaluating a Consumption Decision
An individual receives a one-time payment of $1,000, which is their only source of funds for both this month and the next. Assuming this individual prefers a stable standard of living, their best course of action is to spend the entire $1,000 this month.
Evaluating Financial Windfall Decisions
Analyzing a Lump-Sum Consumption Choice
A recent graduate receives a one-time signing bonus of $10,000. This is their only source of money until their first paycheck arrives in two months. They are considering two plans:
- Plan A: Spend $9,000 in the first month and $1,000 in the second month.
- Plan B: Spend $5,000 in the first month and $5,000 in the second month.
Assuming the graduate's primary goal is to maintain a consistent level of well-being across both months, which statement best analyzes the situation?
Evaluating a Financial Plan
Evaluating Financial Advice
Evaluating a Lottery Winner's Spending
An individual receives a one-time payment of $1,000, which is their only source of funds for both this month and the next. Assuming this individual prefers a stable standard of living, their best course of action is to spend the entire $1,000 this month.