This problem uses calculus to compare two scenarios of consumer optimization.

a. Nina has the following utility function:

She starts with wealth of $120,000, earns no additional income, and faces a zero interest rate. How much does she consume in each of the three periods?

b. David is just like Nina, except he always gets extra utility from present consumption.
From the perspective of period one, his utility function is

In period one, how much does David decide to consume in each of the three periods? How much wealth does he have left after period one?

c. When David enters period two, his utility function is

How much does he consume in periods two and three? How does your answer here compare to David’s decision in part (b)?

d. If, in period one, David were able to constrain the choices he can make in period two, what would he do? Relate this example to one of the theories of consumption discussed in the chapter.

Transcribed Image Text:

U In(C) + In (C) + In(C).