What does the permanent-income theory of consumption predict you would most likely do with $25,000 that you just won on a TV game show?
A)travel throughout Europe and eat in five-star restaurants
B)invite all your friends to a big bash
C)put the money in the bank to finance your next year in college
D)take a trip to Las Vegas to try and double your winnings
E)none of the above

Question

Quizplus · Accepted Answer

According to the permanent-income theory of consumption, individuals' spending decisions are based on their expected income over the long term, rather than changes to their income in the short term. Winning $25,000 on a game show does not necessarily increase your expected income over the long term, so it is unlikely that you would significantly increase your spending. Putting the money in the bank to finance your next year in college aligns with this theory and would be the most likely choice. Traveling throughout Europe and eating in five-star restaurants or throwing a big party would be examples of short-term increases in spending that do not align with this theory. Taking a trip to Las Vegas to try and double your winnings would be a risky move that does not align with this theory either.

What Does the Permanent-Income Theory of Consumption Predict You Would