Question

Garth inherited $25,000. He needs to decide now much to spend now and how much to save for later. If he saves the money, then he can earn 15% interest on the total before he spends it. Using the information about his marginal utility in the table below, Garth should:

Present Consumption	Marginal Utility from Present Consumption	Future Consumption	Marginal Utility from Future Consumption
0	-	0	-
$5,000	500	$5,750	900
$10,000	400	$11,500	800
$15,000	300	$17,250	700
$20,000	200	$23,000	600

A. spend $5,000 now and $22,250 in the future

B. spend nothing now and $28,750 in the future

C. spend $15,000 now and $13,500 in the future

D. spend $10,000 now and $16,750 in the future

Answer 1

Present consumption	Marginal utility from present consumption	Total utility from present consumption		Future consumption	Marginal utility from future consumption	Total utility from future consumption
0				0
5000	500	500		5750	900	900
10000	400	900		11500	800	1700
15000	300	1200		17250	700	2400
20000	200	1400		23000	600	3000

Checking with every option from where you can get maximum utility.

Option A : 5000 spending now will give 500 utility. 22250 in the future gives somewhat less than 3000 utility. Total less than 3500 utility.

Option B : 28750 in future gives 3500 total utility.

Option C : 15000 spending now gives total consumption of 1200 and 13500 in future gives around 2000 utility. So total around 3200 utility.

Option D : Spend 10000 now gives total utility of 900 and 16750 in the future gives total utility of around 2300 utility.So total of 3200 utility

So option B have maximum total utility.