According to the separation theorem, individuals choose among different income streams by choosing the one with the largest:
A)future value.
B)unconstrained utility.
C)constrained utility.
D)present value.

Question

Quizplus · Accepted Answer

The separation theorem states that individuals' decisions regarding income streams are separated into two steps: first, they choose the stream that maximizes their present value of utility; second, they allocate that stream among consumption and investment/savings according to their own marginal rate of substitution between present and future consumption. Therefore, individuals choose the income stream with the largest present value, which is option D.

According to the Separation Theorem, Individuals Choose Among Different Income