Question

consumption and saving - end of chapter problem use the accompanying graph, which illustrates the marginal benefit of consumption, to answer the following questions. a. you became a licensed electrician last year and have been enjoying a higher income than ever before. you choose to spend the majority of your income on amenities you couldnt previously afford. place point a at a point that plausibly represents your current level of consumption. b. after many years of work as an electrician, a major economic downturn leaves you unemployed. youre finding that you must pinch pennies just to afford basic necessities. you decide to return to school, so you can pursue a career in computer programming. place point b at a point that plausibly represents this level of consumption. c. given the two previous events, place point c at a point that represents consumption smoothing over the long run.

Explanation:

a. When you become a licensed electrician with higher - income, you can afford more consumption and amenities. So point A should be at a higher consumption level compared to previous situations.
b. During economic downturn and unemployment, you can only afford basic necessities, so point B should be at a lower consumption level.
c. Over the long - run, with consumption smoothing considering previous events, point C should be at a moderate consumption level that balances past and future expectations.

Answer:

a. Point A is placed at a high consumption level on the graph (e.g., around consumption level 15 - 20 and a relatively high marginal benefit).
b. Point B is placed at a low consumption level on the graph (e.g., around consumption level 2 - 5 and a low marginal benefit).
c. Point C is placed at a moderate consumption level on the graph (e.g., around consumption level 8 - 12 and a moderate marginal benefit).