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Flexible Felix views present and future consumption as imperfect substitutes and he discounts future consumption by a bit to reflect the uncertainties of his life. His utility function is given by U(C_0,C_1 )=3C_0+(4C_1) ⁄ ((1+δ) ) where δ (which is a small positive number) is the discount rate he applies to C_1.
Graph Felix’s indifference curve map.
Show that if 3δ=1+4r, (r= the real interest rate), then Felix is indifferent between C_0 and C_1.
What do you conclude about the relationship between a person’s savings behavior and his or her “impatience”?
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