Question

15.3

a. Nina starts with wealth of $120,000, earns no additional income, and faces a zero interest rate. How much does she consume in each of three periods if she has the following utility function: U = ln(C₁) + ln(C₂) + ln(C₃)

b. David starts with wealth of $120,000, earns no additional income, and faces a zero interest rate. How much does she consume in each of three periods if he has the following utility function: U = 2 ln(C₁) + ln(C₂) + ln(C₃)

Hint: For both a. and b. Equate the slope of the budget constraint, 1+r, to the slope of the utility function, the marginal rate of substitution between consumption in any two periods i.e. the ratio of marginal utilities. Note marginal utility is the first derivative of total utility.

Answer 1