Intertemporal Rate of Substitution Question
Julie Carlisle is a financial planner at a large wealth management firm. One of her
clients, Esteban Blake, just received a sizable inheritance. He invests a portion of the
inheritance in an annuity that will immediately increase his income by a substantial
Holding all else constant, the change in Blake’s income will most likely result in:
A an increase in his marginal utility of consumption.
B an increase in his intertemporal rate of substitution.
C a decrease in his required risk premium for investing in risky assets.
The correct answer is C. Not sure why B is wrong. If as wealth increases, marginal utility of current consumption decreases, then shouldn’t intertemporal rate of substitution increase? Why is B wrong in that case? Thanks!
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