The next questions refer to the following.
An individual is endowed with $100 of income in period 1, and will receive an income of 121 in period 2. The interest rate is 10%, and there are only 2 periods.
-In order to have the same level of consumption in both periods,each period's consumption must be
A) 80
B) 100
C) 110
D) 110.5
E) 121

Question

Quizplus · Accepted Answer

To have the same level of consumption in both periods, we need to find the present value of the second period's income using an interest rate of 10%. 
PV = FV / (1+r)^n
PV = 121 / (1+0.1)^2
PV = 100
Therefore, we can consume $100 in both periods, which means each period's consumption must be $110. Choice C is the correct answer.

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