Demo: Three-Period Life Cycle Problem

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.

Default
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.

Input Parameters

Discount Factor
Interest Rate
Utility Function
Wage Income Period 1 
Period 2 
Period 3 
Solver

  

Solution

Objective Value
Consumption Period 1 
Period 2 
Period 3