BUSI620 Module 2: Questions

BUSI620: FORUM 2 - Questions 5 and 1

BUSI620: FORUM 2 - Questions 5 and 1 This paper explores the importance of savings in households and in the economy. It also compares finds the elasticity of a good and seeks to compare its effects to a second good through point price (and cross-price) elasticity of demand. Question 5
How important is saving for a household and the economy? How much should be saved?
Saving may be important to a household for Biblical and retirement reasons, but also because it affects the savings of the economy (Feldstein, 2008). According to Feldstein, national saving is the aggregate of household saving and corporate savings minus any national deficit (2008). Corporate retained earnings have been high but
household savings have been around 0.5% (Feldstein, 2008). This would describe why the deficit is so low. As household savings increases, the deficit should decrease. The average household savings is 6.92% and for 2013 it stood at 4.2% (YCharts, 2014). Clearly US households must continue to increase their savings to help decrease the deficit. By decreasing the national deficient, national saving would increase thereby helping the economy. Running a deficient is not inherently bad in short term business, perhaps as the business starts to build momentum. In the case of the economy, savings should be a priority for the sake of increasing or sustaining the value of the dollar (Feldstein, 2008).
From a retirement perspective, savings is important to a household for achieving a desired cash flow at retirement age. A household would save whatever is required to reach this desired cash flow state. These savings should be invested to create a standard of living comfortable for the individual, and the family that may otherwise support them. From a Biblical perspective, prudency with money is taught throughout the scripture. It does not, however, seem that the emphasis of the New Testament is to live a comfortable or even a “safe” life with regard to money. Rather, we are called to a life of dependency on God and the Holy Spirit, where His prompting can ask us to leave everything behind to fulfill the Great Commission. This is mirrored in the calling of Jesus’s disciples where Jesus made it clear that they could be left with nothing by following Him. It is also mirrored in the parable of the farmer who decided to save up all his grain (money) in new silos only to have his life asked of him that very night. This parable of Jesus in Luke chapter 12 almost seems to point against one emphasizing savings/retirement so strongly. Interestingly, it is after this parable (about storing up wealth) that Jesus tells his disciples to not worry about life, what to eat, what to wear, etc., because we should first seek the kingdom of God and then all these will be added to our lives. To make his point more clearly, Jesus ends with: “Sell your possession and give to charity […] for where your treasure is, there your heart will be also” (Luke 12:33-34 NASB).

Question 1
The demand function for Good X is defined as Qx = 75 - 2Px - 1.5Py where Py is the price of Good Y. Calculate the price elasticity of demand using the point formula for Px = 20 and Py = 10. Determine whether demand is elastic, inelastic, or unit elastic with respect to its own price and whether Good Y is a substitute or a complement with respect to Good X.
Given the above the solution is below.
The Qx for Good X where Px = 20 and Py = 10 is:
Qx = 75 – 2(20) – 1.5(10) = 20
Point price elasticity of demand: Ex = -2 * (20/20) = -2
Absolute value of -2 is greater than 1 so at this point of the liner curve Good X is elastic.
Point cross-price elasticity of demand: Exy = -1.5 * (10/20) = -.75
Exy is negative so Good X and Good Y are complimentary.
Absolute value of -.75 is close to zero, so Good X and Good Y could be independent commodities or just not very strong compliments.

Conclusion
The importance of savings for the economy is discussed and juxtaposed with the calling of Jesus to rely on him rather than on money. Finally, point price elasticity was found for Good X while Good Y was found to be its compliment.
References
Feldstein, M. (2008, Summer). Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate. The Journal of Economic Perspectives, 22(3), 113-125. Retrieved from http://search.proquest.com.ezproxy.liberty.edu:2048/pqcentral/docview/212100008/1432735BF913740AA11/22?accountid=12085#
Froeb, L. M., McCann, B. T., Shore, M., & Ward, M. R. (2014). Managerial Economics (3rd ed.). Mason, OH: South-Western Cengage Learning.
YCharts. (2014, January 23). US Personal Saving Rate. Retrieved from YCharts:
http://ycharts.com/indicators/personal_saving_rate