Question

An individual who is considering consumption between two time periods (year 1 and year 2) has an endowment of $20,000 in year 1 and $15,000 in year 2. If the interest rate is 5 percent, what is the maximum approximate amount that can be spent on consumption in year 1

Answer 1

Answer: A $34,250

Explanation:

Maximum approximate amount that can be spent in year 1 is the endowment in year 1 plus the present value of the year 2 endowment in year 1.

= 20,000 + 15,000/ ( 1 + 5%)

= 20,000 + 14,285.71

= $34.285.71

= $34,250 is nearest amount in options.