Answer-According to Modigliani’s Life-Cycle Hypothesis (LCH), if an individual receives an unexpected one-t...

According to the Life-Cycle Hypothesis, individuals attempt to smooth their consumption over their lifetime. Suppose an individual unexpectedly receives additional wealth equal to W and has T years of remaining life expectancy. The individual spreads the additional wealth approximately evenly over the remaining years. Therefore Change in Consumption W T The Marginal Propensity to Consume out of the windfall is MPC Change in Consumption Change in Wealth Therefore MPC 1T Since T is generally greater than 1, only a fraction of the one-time windfall will be consumed immediately. Thus, the MPC out of a temporary windfall is relatively small.

Question

According to Modigliani’s Life-Cycle Hypothesis (LC

C out of this windfall will be:
H , if an individual receives an unexpected one-time cash windfall late in their working life, their Marginal Propensity to Consume (MP