Question

Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year. The market interest rate is 10% (Mr. Smith can both lend and borrow at this rate). What will be his consumption next year if Mr. Smith invests in the project and consumes $50,000 this year

Answer 1

Answer:

"$52,000" is the correct answer.

Explanation:

Given:

This year income,

= $40,000

Next year income,

= $60,000

Market interest rate,

= 10%

or,

= 0.1

Now,

The next year consumption will be:

= $[40,000 - 30,000 - 50,000]\times 1.1 + (60,000 + 36,000)$

= $-40,000\times 1.1+96000$

= $-44000+96000$

= $52000$ ($)