It is October and you want to save presents for the upcoming holiday season. You know that saving in October and November allows you to get some really nice presents for your loved ones in December. Saving and saving again is no fun, but you get a high utility at the end when your loved ones open the presents, and your utility stream is 5-5-29.

You can also save in October, splurge in November, and still end up with decent presents in December, for a utility stream of 5-11-17.

You can also just spend, and spend, in which case your utility stream is 8-8-11.

Now, suppose you are an exponential discounter and your =1.

1. In October, which strategy would you choose?

Would you choose (save-save), (save-spend) or (spend-spend)?

(Hint: Find present value of discounted utility streams for each strategy and compare them).

Show all your calculations.

U^October(save, save)=?

U^October(save, spend)=?

U^October(spend, spend)=?

Why? Explain.

2. In November, which strategy would you choose?

Would you choose (save) or (spend)?

(Hint: Find present value of discounted utility streams for each strategy and compare them).

U^November(save)=?

U^November(spend)=?

Why? Explain.

Now, suppose you are an hyperbolic discounter and your =1 and =1/3

3. In October, which strategy would you choose?

Would you choose (save-save), (save-spend) or (spend-spend)?

U^October(save, save)=?

U^October(save, spend)=?

U^October(spend, spend)=?

Why? Explain.

4. In November, which strategy would you choose?

Would you choose (save) or (spend)?

(Hint: Find present value of discounted utility streams for each strategy and compare them).

U^November(save)=?

U^November(spend)=?

Why? Explain.