題組內容

1. Suppose you divide your life into two periods: working age and retirement age. When you work, you earn labor income y; when retired, you earn no labor income, but must live off your savings and the interest it earns. While working, you save the amount s, earning interest at a constant rate r, so you have (1 + r)s to live on when retired. Because you don't need to consume as much when retired, you want to set consumption when working ($c^w$) twice as high as consumption when retired ($c^r$).

(3) Suppose the interest rate rises, starting from the situation in part (a). Will you save more or less in your working period? Discuss the change of your saving plan based on the substitution effect (SE) and income effect (IE), separately. (5 分)