Are you sure you've copied these questions correctly?
Consume means to use up. How can she "consume" over twice her income in year 0?
Is she earning or paying 4% interest?
The second question is just as confusing.
Where are you getting these questions?
Not sure how to solve:
Two Questions:
(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%?
6 answers
This is how I interpret your question #1.
(1) Cindy starts year 1 with a debt of $26,000-12,000 = $14,000 from year 0, or a bit less if she has been making minimum payments on the loan or credit card that she uses to pay the bills. If she is lucky enough to get 4% financing (which is unlikely, judging by her spending habits), and she wants to pay her debt off by the end of year 1, then she will have to pay off about 14,280 during year 2. That is 14,000 + (average yr. 0 balance x 4%). She also needs 14,000 for consumption in year 1, so she will need to earn $8,280. She'd better start looking for a higher paying job.
This reads like a student loan type of situation, in which case there is no requirement to pay off the loan at the end of year 1. Cindy might choose to pay interest only on the loan during year 1 without increasing the loan balance, or to go further in debt, if allowed to do so. This question requires a lot more information to answer accurately.
(1) Cindy starts year 1 with a debt of $26,000-12,000 = $14,000 from year 0, or a bit less if she has been making minimum payments on the loan or credit card that she uses to pay the bills. If she is lucky enough to get 4% financing (which is unlikely, judging by her spending habits), and she wants to pay her debt off by the end of year 1, then she will have to pay off about 14,280 during year 2. That is 14,000 + (average yr. 0 balance x 4%). She also needs 14,000 for consumption in year 1, so she will need to earn $8,280. She'd better start looking for a higher paying job.
This reads like a student loan type of situation, in which case there is no requirement to pay off the loan at the end of year 1. Cindy might choose to pay interest only on the loan during year 1 without increasing the loan balance, or to go further in debt, if allowed to do so. This question requires a lot more information to answer accurately.
typo: $8280 should be $28,280 in the first paragraph. My computer erased the 2 when I inserted the $
Thanks for the responses. This (Finance) professor is notorious for using ambiguous problems.
(2) The 6.7% capital gain on the investment barely covers the 4% interest rate loan that made the investment possible, so let's just ignore it. The profit is less tan $1000.
ASSUMING that Jonathan wants to end year 1 without debt, then his two-year income of 110,000 should match or exceed his two-year consumption of 70,000 + X. X, the first-year consumption, should not exceed $40,000.
The answer you get depends upon assumptions that have to be made, because the "ground rules" of the problem are not clearly stated.
ASSUMING that Jonathan wants to end year 1 without debt, then his two-year income of 110,000 should match or exceed his two-year consumption of 70,000 + X. X, the first-year consumption, should not exceed $40,000.
The answer you get depends upon assumptions that have to be made, because the "ground rules" of the problem are not clearly stated.
Will if your in shiller's class at UNB than ignore these answers they are all wrong
0 answers