Answer to Question #202652 in Microeconomics for Chulumanco

Question

Consumption 

1. Explain what is meant by the permanent income hypothesis.
2. With reference to the permanent income hypothesis, distinguish between transitory income and permanent income.
3. With reference to the permanent income hypothesis, distinguish between transitory and permanent consumption.
4. With reference to the permanent income hypothesis, identify an example of positive transitory income.
5. With reference to the permanent income hypothesis, identify an example of negative transitory income.
6. With reference to the permanent income hypothesis, identify an example of positive transitory consumption.
7. With reference to the permanent income hypothesis, identify an example of negative transitory consumption.
8. With reference to the permanent income hypothesis, identify an example of positive transitory income

Answer 1

1. Permanent income hypothesis is a theory of consumer spending that states a person spends money at levels consistent with the expected average incomes.
2. Permanent income refers to the average flow of income that one expects to receive while transitory income is the difference between permanent income and current income. 
3. Transitory consumption refers to the unexpected or unanticipated consumption while permanent consumption refers to the average income spent on acquisition of goods and services by households.
4.  An example of positive transitory income is inheritance.
5. An example of negative transitory income is low income for farmers due to poor harvests.
6. An example of positive transitory consumption is low health bill for a household.
7. An example of negative transitory consumption is unexpected medical emergency that attracts high bills.
8. An example of positive transitory income is high income for farmers resulting from good harvest.