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Irvin Fisher's inter-temporal choice describes how a rational consumer chose a level of consumption (C), that maximizes their lifetime utility given by U = u(C1)
Irvin Fisher's inter-temporal choice describes how a rational consumer chose a level of consumption (C), that maximizes their lifetime utility given by U = u(C1) + u(C2) You are 1+0 informed that income in period 1 is Y, and consumption in period 1 is Ci . If the household borrows, then Y1 C1 . In the first period, the household saves if it does not exhaust its income so that S = Y1 - C1. Consumption in period 2 is C2 and income is Y2 It also consumes the principal saved in period 1. In essence: C2 = (1 + r)S + Yz a) Derive the inter-temporal budget constraint for the rational consumer. (Hint replace S by its definition and make the consumption elements equal to income elements b) Find the consumer's optimization equation (euler equation) and interpret it. c) Draw your intertemporal choice decisions and welfare implications for a saver. (10) d) What are the limitations of the Ricardian Equivalence Theory in relation to private consumption
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