QUESTION 2: TIME DISCOUNTING

Viggo is thinking about retirement. He knows that he will live for only two more periods beyond today, or period 1. He will have only an income in period 1 of $10000 and needs to decide about retirement in period 2 and 3.

He has a discount rate of 5% and a utility function () = .. He is an expected utility maximizer and uses exponential discounting to discount consumption over time. Therefore, he makes intertemporal choices according to the following valuation function

= () + () + (), where = ( )

QUESTION 2 - PART 1

Viggo has the option of consuming all his income in period 1. Calculate the utility that he will derive from this option.