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 yearly taxes are $20 000 and Hector completely smooths consumption over his lifetime,Hector's annual consumption is ________ less than it would be if yearly taxes were zero.
A) $5000
B) $7500
C) $15 000
D) $20 000

Question

Quizplus · Accepted Answer

If there were no taxes, Hector's annual consumption would be his annual salary of $80,000. However, since he has to pay $20,000 a year in taxes, his annual disposable income is $60,000 ($80,000 - $20,000). In order to smooth consumption, Hector will consume the same amount every year, which means that his annual consumption will also be $60,000.

Therefore, his annual consumption is reduced by $20,000 - $15,000 = $5,000 if he completely smooths consumption over his lifetime. The correct choice is (C) $15,000.

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