For the best results, we recommend using Firefox for this interactive case study.
To solve the Three-Period Life Cycle Consumption Problem:
- Enter a discount factor and an interest rate.
- Select a utility function.
- Enter an income path. For example, the default income path \((w_1 = 2; w_2 = 3; w_3 = 0)\) corresponds to a life
cycle with wage income increasing from period 1 to period 2 and then decreasing to 0 in retirement.
- Click "Submit" to solve the problem using the NEOS Server.
- Wait for the results to show up in the solution section at the bottom. The solution section will display the
objective value and the optimal amount to consume in each period.
Examples: If we run the applet with the exponential utility function and the default values, we obtain a solution with consumption values \(c_1 = 1.71\), \(c_2 = 1.79\), and \(c_3 = 1.87\). If we select the logarithmic utility function instead, we obtain a solution with consumption values \(c_1 = 1.66\), \(c_2 = 1.79\), and \(c_3 = 1.93\).
Back to Three-Period Life Cycle Problem case study.