Mandy Marguerita lives two periods. Her initial accumulated wealth (W) in period 1 (inherited from Mom) is $ 20, and her income in period 1 is $ 90. Her income in period 2 is $ 110. Mandy does not leave bequests to her children (couple of deadbeats) when she dies at the end of period 2. The real interest rate is 10% per period. Mandy would like to smooth consumption completely. That is, she wants to have the same level of consumption in both period 1 and period 2.
(a) Compute Mandy’s total sources of funds in terms of their value in period 1. Remember to include W.
(b) Write the equation for Mandy’s lifetime budget constraint, and graph the budget line. For the following question, Mandy does not consume out of W in period 1. She lets it grow at the stated interest rate.
(c) How much will Mandy save and consume in period 1?
(d) How will Mandy’s saving and consumption in period 1 be affected by an increase of period 1 real income by $ 11?
(e) How will Mandy’s saving and consumption in period 1 be affected by an increase of period 2 real income by $ 11?
(f) How will Mandy’s saving and consumption in period 1 be affected by an increase of initial real wealth in period 1 by $ 11?