Consider an investor who is subject to habit formation, where the investors habit level is a simple

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Consider an investor who is subject to habit formation, where the investor’s habit level is a simple weighted average of consumption in the previous three periods,image text in transcribed

and the investors utility in any period isimage text in transcribed

The investor consumed $105 last year, $95 the year before that, and $90 the year before that. The investor is considering two potential investments. An investment in GRW will allow the investor to consume $110 this year, and $120 next year. An investment in DCL, is just the reverse, allowing the investor to consume $120 this year, and $110 the following year. Assume that the discount rate is zero.Which investment will provide the investor with the most utility over the next two years?

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