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p 14 (C1) U'= (C5) +PUfo} yo Co Figure 2.2 Lifetime utility maximization Individuals maximize their lifetime utility U given their expected lifetime income YD.

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p 14 (C1) U'= "(C5) +PUfo} yo Co Figure 2.2 Lifetime utility maximization Individuals maximize their lifetime utility U" given their expected lifetime income YD. The diagram illustrates this intertemporal optimization as a twoperiod problem over today and tomorrow. 0 A} If they discount the future less for a given interest rate, they will consume less today. 0 B) If the interest rate falls and the substitution effect dominates the income effect they will consume less today 0 C] If their lifetime income rises they will surely consume less both today and tomorrow. 0 D) If they discount the future less for a given interest rate, they will consume more today. 0 E) If the interest rate rises and the substitution effect dominates the income effect they will consume more tod ay

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