Consumption.docx - Chapter 5 Consumption Consumption smoothing people try to have equal consumption over their lifetime The pattern of lifetime savings

# Consumption.docx - Chapter 5 Consumption Consumption...

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Chapter 5- Consumption Consumption smoothing people try to have equal consumption over their lifetime The pattern of lifetime savings is determined by consumption smoothing and income. 5.1 factors affecting consumption Current (disposable) income Expected (disposable) future income Expected wealth (disposable Real interest rates
Assume that you can borrow money-no liquidity costs C=f(Y-T) o Current wealth, expected future wealth, expected future income, riskiness of expected future wealth) 5.3 Calculating present value 5.4.1 Budget constraint 5.4.2 Utility maximization U = u(C,C +1 ) Utility – original – like temperature Time separable utility Rate of time preference o P is around 3% per year
Marginal utility o Amount of extra utility she gets from an extra unit of consumption in one period Assumptions about utility function o Marginal utility is always positive o Is decreasing o If consumption is 0, first unit of consumption increases utility a lot : MUC is high when C = 1 Indifference curves o Along an indifference curve, utility is constant 5.4.3 optimal choice of consumption

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