In the life cycle model, total amount available for consumption in period 0 is: A)C₀= M₀+ M₁- C_1. B)C₀= M₀+ (M₁- C₁)/(1 + i). C)C₀= M₀+ (1 + i)(M₁- C₁). D)C₀= M₀+ (1 + i)/(M₁- C₁).

Question

Quizplus · Accepted Answer

According to the life cycle model, total amount available for consumption in period 0 is equal to the sum of initial resources (M₀) and the present value of future income (M₁- C₁) discounted at the rate of interest (i). So, the correct formula is C₀ = M₀ + (M₁- C₁)/(1 + i), as given in option B.

In the Life Cycle Model, Total Amount Available for Consumption