Answer to Question #72042 in Microeconomics for Izzy

Question

An individual inherited wealth of$150 and he has a current income in period one of $350. The future income in period two is $270 and he leaves a bequest of $50 to his children. It saves $100 in period one. The interest rate is 10%.
a)Derive the equation of the individual’s inter-temporal budget constraint.
b)Find his consumption in period one and in period two.
c)Graph the individual’s budget line and show his equilibrium point.
d)Consider the original case of an interest rate at 10%. Discuss and show graphically what the equilibrium could be if the individual had received a higher inheritance.
e)Consider the original case of an interest rate at 10%. Discuss and show graphically now what the equilibrium of this individual could have been if the he had NOT received any inheritance but had borrowed $50 during the first period, and had received a future income of $435, still leaving a bequest of $50.Link your finding to the predictions of the Permanent Income Hypothesis theory.