5 Suppose your income in year 1 is 1000 and in year 2 it inc

5. Suppose your income in year 1 is $1.000 and in year 2 it increases to S1,100. If you choose your income following the PIHI how much should you consume in each year? 6. Suppose your income in question 1 rises by $100 per year How much should your consumption rise in each year? 7. Suppose your income from question 1 increases by $100 only in year 1 How does this affect your consumption choice in each year?

Solution

As per Chegg guidelines, first question is answered below

1.

The Permanent Income Hypothesis states that individuals average out their consumptions based on their long term Income.

Income in first year = 1000

Income in second year = 1100

Total income in 2 years = 1000 + 1100 = 2100

Average consumption that should be done in each year = 2100/2 = $1050