Please use diagram and all the necessary equations. Thanks.

Question:

Outline a two-period model of consumption based on inter temporal behavior. Provide an interpretation for the consumption Euler equation. Derive the consumption function for your two-period model and determine the consequence of an increase in future income.

Subjects:

Consumer Optimization (Two Period)

Intertemporal Optimization

Consumption Euler equation and Consumption Function.

http://www.economics.soton.ac.uk/staff/alicesch/Teaching/200910/Econ2004/ch6a_slides_hand.pdf