3.

2 : Households

1. B
2. A
3. B
4. D
a. The opportunity cost is the next best alternative forgone and might be
spending on a new car for instance.
b. Young workers are just beginning their career and so might have limited
income so will have a low average propensity to save preferring to used
their disposable income on consumption. Whereas middle aged people are
perhaps earning more money and so have money to save after
consumption has taken place and so have a higher average propensity to
save
Young workers are more focused on the present and are less concerned
with saving for the long-term in terms of funding education for their
children and eventual retirement so young workers choose not to save
because such events are far into the distance and so these people prefer to
consume and enjoy today and not worry about tomorrow. Middle-aged
workers are thinking about the long-term: they are planning for their
retirement, they are saving in case of ill-health, they are saving for when
they are unable to work anymore – they have a high average propensity to
save.
c. Households will borrow less if interest rates rise because the cost of
borrowing will increase with the repayments taking up a greater proportion
of their limited disposable income so the interest payments represent an
opportunity cost as the money spent on interest could have been used for
something else such as a holiday.

A household which is not confident about the economy may reduce

borrowing because they are uncertain about their jobs, about future
income. If they were to lose their job then they would not be able to repay
the loan to the bank and would then be considered a high credit risk in the
future which would limit the amount they could borrow in the future.

A household which has seen a reduction in its wealth may reduce

borrowing. Wealth is the net assets owned by a household and provides
something to fall back on if the flow of income is reduced or stopped. So, if
 the value of a property owned by the household increases in value, then
the household is likely to borrow more because they can sell the property
to repay the loan if needs be - wealth increases confidence.
d. An increase in income may increase spending because consumers then
have more spending power therefore creating increased demand because
of the positive income effect so the average propensity to consume will
increase. However, if the consumer already earns a very high income, then
the increased income may not increase spending because this consumer
may have a very low average propensity to consume because they already
have everything they need and a lot of what they want so may choose to
save the increased income rather than consume.
An increase in income may not increase spending because the consumers
may not be confident about the future of the economy and so may be
concerned about their job prospects and so rather than spending their
increased income, they may choose to save it just in case they are made
redundant due to a lack of demand in the economy.