Questions: Suppose that every consumer is born with zero financial wealth and lives for three periods: youth, middle age, and old age. Consumers work in the first two periods and retire in the last one. Their income is 5 in the first period, 25 in the second, and 0 in the last one. Inflation and expected inflation are equal to zero, and so is the real interest rate. The present discounted value of labor income is at the beginning of the first period of life. (Enter your response as a whole number.) If consumption is equal in all three periods, the highest sustainable level of consumption per period is (Enter your response as a whole number.)

To solve this problem, we need to calculate two things: the present discounted value of labor income and the highest sustainable level of consumption per period.

1. Present Discounted Value of Labor Income:

   Since the real interest rate is zero, the present value of future income is simply the sum of the income in each period, as there is no discounting.

   • Income in the first period: \$5
   • Income in the second period: \$25
   • Income in the third period: \$0 (since they are retired)

   Therefore, the present discounted value of labor income is: \[ \$5 + \$25 + \$0 = \$30 \]

2. Highest Sustainable Level of Consumption per Period:

   To find the highest sustainable level of consumption per period, we need to divide the total present value of income by the number of periods (3 periods).

   Total income over the three periods is \$30, and since consumption is equal in all three periods, we divide this total by 3: \[ \frac{\$30}{3} = \$10 \]

   Therefore, the highest sustainable level of consumption per period is \$10.

Summary:

• The present discounted value of labor income is \$30.
• The highest sustainable level of consumption per period is \$10.