Consider the choice between consuming c1 dollars today versus c2 dollars one year from now. A consumer's preference ranking of c1 versus c2 is given by the utility function U(c1, c2). The consumer receives income of I1 dollars today and I2 dollars one year from now. The consumer can save or borrow at the interest rate r. This stream of income is allocated between consuming now and consuming one year from now. The consumer can spend nothing a year from now and borrow a maximum of I2/(1+r) to increase today's consumption from I1 to I1 + I2/(1+r) . Alternatively, the consumer can spend nothing today, save all today's income at the interest rate r, and receive, in addition to I2, the proceeds of saving, (1+r)I1. Thus, the maximum consumption one year from now is (1+r)I1 + I2.