Consider the special case solved in the text where β=1 and utility takes the log form. Suppose the real interest rate is 5 percent. Let's give this consumer a financial profile that might look like that of a middle-aged college professor contemplating retirement: suppose initial assets are ftoday =$50,000 and the path for labor income is ytoday = $100,000 and yfuture = $10,000.
1. What is the individual's human wealth? Total wealth?
2. According to the neoclassical model, how much does the college professor consume today and in the future? How much does the college professor save today?
3. If current labor income rises by $20,000 by how much will saving change?