present consumption and future consumption. The highest level of utility that Quentin can achieve at his

original intertemporal budget constraint occurs at point A, where he is consuming $6,000, saving $4,000 for

the future, and expecting with the accumulated interest to have $7,200 for future consumption (that is, $4,000

in current financial savings plus the 80% rate of return).

However, Quentin has just realized that his expected rate of return was unrealistically high. A more realistic

expectation is that over five years he can earn a total return of 30%. In effect, his intertemporal budget

constraint has pivoted to the left, so that his original utility-maximizing choice is no longer available. Will

Quentin react to the lower rate of return by saving more, or less, or the same amount? Again, the language of

substitution and income effects provides a framework for thinking about the motivations behind various
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