Hector's wealth is zero,he expects to work for another 45 years at a constant salary of ?$80 000 and live for another 60 years.If Hector receives a $20 000 bonus during his first year of work and he completely smooths consumption over his lifetime,his marginal propensity to consume out of a transitory increase in income is
A) 0.004.
B) 0.017.
C) 0.075.
D) 0.75.

Question

Quizplus · Accepted Answer

Hector's total lifetime income is $80,000 * 45 + $20,000 = $3,620,000. He will live for 60 years, so his annual consumption is $3,620,000 / 60 = $60,333.33. The $20,000 bonus is spread over 60 years, so the marginal propensity to consume out of the bonus is $20,000 / $3,620,000 = 0.017.

Hector's Wealth Is Zero,he Expects to Work for Another 45