Answer:
A) How much should Gwen consume in the average year?
Gwen should consume the average money she earns taking into account the good and bad years.
In the good years, she is earning $90,000, and in the bad years she is earning $20,000. We simply obtain the average:
$90,000 + $20,000 = $110,000/2 = $55,000
B) How many dollars will she save during the good years?
Personal saving equals disposable income minus consumption. As stated above, during the good years she will consume $55,000, while having a disposable income of $90,000. Her personal saving will then be:
$90,000 - $55,000 = $35,000
C) How many dollars will she borrow during the bad years?
During the bad years, Gwen is making $20,000, while consuming an average of $55,000 per year. Therefore, her total borrowing during the bad yeras is:
$55,000 - $20,000 = $35,000
In other words, for every bad year, she will exhaust a total good year's savings.
