Problem 12 According to towerswatson.com, a... [FREE SOLUTION]

Chapter 4: Problem 12

According to towerswatson.com, at large employers, $48 \%$ of employees earning between $\$ 10,000$ and $\$ 24,999$ a year participated in a voluntary retirement savings program, compared to $91 \%$ who earned more than $\$ 100,000$. We can view savings as a good. In a figure, plot savings versus all other goods. Show why a person is more likely to "buy" some savings (put money in a retirement account) as the person's income rises.

Short Answer

Expert verified

Higher incomes enable increased savings while still affording other goods.

Step by step solution

Understand the Relationship

We are examining the relationship between an individual's income and their likelihood to save, specifically through a retirement savings program. To do this, we consider two different income groups: low income ($10,000-$24,999) and high income (more than $100,000).

Identify Key Variables

In this exercise, the variables are 'savings' and 'all other goods'. Savings is represented by the percentage participation in the retirement savings program, which is 48% for the low-income group and 91% for the high-income group.

Set Up the Graph

To plot these variables, draw a graph with 'Savings' on the vertical axis and 'All Other Goods' on the horizontal axis. You can think of this as an individual's budget constraint showing how they allocate their income between savings and all other goods.

Plot Points for Different Incomes

On the graph, plot two points representing the participation rates: one at (48, low income) and another at (91, high income). These points will demonstrate different savings behaviors at different income levels.

Explain the Income Effect

As income increases, individuals are able to allocate more to savings while still maintaining or increasing consumption of other goods. This ability to afford more of both goods is demonstrated by the higher savings proportion observed in the higher income group.

Illustrate with Budget Lines or Indifference Curves

Draw a budget line for a low-income individual and another for a high-income individual, showing possible allocations between savings and other goods. Higher income allows the budget line to shift outwards, increasing the opportunity to save.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Savings Behavior

Savings behavior refers to how individuals decide to allocate their income towards savings. This behavior can widely vary depending on various factors including income levels, financial goals, and personal preferences. In the context of a retirement savings program, we see that savings behavior is notably different between lower and higher income groups.

Lower-income individuals tend to have a lower participation rate in savings programs. This is often because they need to allocate a larger portion of their limited income towards essential expenses like food, housing, and transportation.
Higher-income individuals, on the other hand, have more flexibility in their budgets. After covering their necessary expenses, they have more discretionary income that they can choose to save for future needs like retirement.

Understanding savings behavior is key to designing effective financial programs and policies that encourage more people to save for the future.

Budget Constraint

A budget constraint represents the trade-offs a person faces between two or more goods, given their income. In this exercise, we consider savings and all other goods as the two goods. The budget constraint shows all possible combinations of how a person can allocate their income between these goods.
A key element of the budget constraint is that with higher income, the constraint shifts outward. This means that the person can afford more of both goods - savings and other consumable items.

For someone with lower income, their budget constraint is tighter, meaning they have less flexibility in how they allocate their money.
As income rises, individuals find it easier to participate in savings programs since they can satisfy their immediate needs and still have money left over to "buy" savings.

This relationship helps explain why higher-income groups have higher participation rates in savings programs.

Income Groups

Income groups categorize individuals based on their earnings, which influences their financial behavior. In this exercise, the income groups are separated into low-income earners ($\(10,000-$24,999\)) and high-income earners (more than $$100,000$).This division allows us to observe trends and differences in financial priorities:

Lower-income groups often struggle to save due to the need to cover basic living expenses.
Higher-income groups, because they earn more, find it relatively easier to allocate a portion of their income to savings, as they have more disposable income.

These insights help policymakers and financial advisors tailor efforts to boost savings rates among different income groups by understanding their unique challenges and opportunities.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

91影视