Homework 10-New

1) In a precise and detailed essay explain the Life-Cycle Theory of Consumption.

2) Consider the following Keynesian consumption function:

C = 2,500 + 0.80Y

Where C is consumption expenditure and Y is disposable income. Consider two families:

Family A: Y = $100,000
Family B: Y = $20,000

a) Calculate the Average Propensity to Consume (APC) for two families.

b) Which family has a larger APC? Explain the APC difference.

3) Consider the following life-cycle consumption function:

C = 2,500 + 0.80Y + 0.05W + 0.70G

Where W is the family wealth and G is average age of the parents. Consider the same two families:

Family A: Y = $100,000 W = $1,000,000 G = 600 months
Family B: Y = $20,000 W = -30,000 G = 336 months

a) Calculate the Average Propensity to Consume for two households

b) Which family has a larger APC? Use the Life-Cycle Theory of Consumption to explain the APC difference.