Question
Which one of the following hypotheses postulates that
individual's consumption in any time period depends upon resources available to the individual, rate of return on his capital and age of the individual?Solution
The life-cycle theory of consumption, popularly known as life-cycle hypothesis,' was developed by Ando and Modigliani" in the early 1960s. The life-cycle hypothesis postulates that individual consumption in any time period depends on (i) resources available to the individual, (ii) the rate of return on his capital, and (iii) the age of the individual. The resources available to an individual consist of his existing net wealth and the present value of all his current and future labour incomes. According to the life-cycle hypothesis, a rational consumer plans consumption on the basis of all his resources and allocates his income to consumption over time so that he maximizes his total utility over his life time.
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