Question: Consider the Permanent Income Hypothesis we studied in class. Preferences are quadratic, u(ct) = ?1 2 (ct ? c)2; planning horizon is in nite; income

Consider the Permanent Income Hypothesis we studied in class. Preferences are quadratic, u(ct) = ?1 2 (ct ? c)2; planning horizon is in nite; income stream is known as of time 0. Consider two individuals, X and Y . Individual X's income starts at 121 at time 0, drops to 110 at time 1 and stays at 110 thereafter, while individual Y 's income starts at 110 at time 0, grows to 121 at time 1 and stays at 121 thereafter. The real interest rate, r, equals 10%; and consumers discount future utility ows using the discount factor = 1 1 r

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