Retirement savings When young, many people fully intend to save for retirement. However, when they start making money after college, they are often tempted to spend it immediately. Assume that Ximena and Yves have the choice between the following two options:

(a) saving for retirement at time 1 (u1 5 0) and retiring in style at time 2 (u2 5 12); and

(b) having more disposable income at time 1 (u1 5 6)

and retiring poor at time 2 (u2 5 0).

Ximena is an exponential discounter. Her d 5 2/ 3.

(a) At t 5 0: What is her utility of a? What is her utility of b?

(b) At t 5 1: What is her utility of a? What is her utility of b?

Yves is a naive hyperbolic discounter. His b 5 1/ 3 and his d 5 1.

(c) At t 5 0: What is his utility of a? What is his utility of b?

(d) At t 5 1: What is his utility of a? What is his utility of b?

(e) Who is more likely to experience regret?

(f) Who is more likely to retire in style?