C10 - Intertemporal Choice Flashcards
the future value one period from now of $m =
FV = m(1+r)
define intertemporal choice
choices of consumption over time
define endowment
budget constraint if consumer saves in period 1 (p1=p2=1)
c2 = m2 + (m1-c1) + r(m1-c1)
= m2 + (1+r)(m1-c1)
in period 2, consumer can consume his m + the amount saved in period 1 + the interest earned on his savings
budget constraint if consumer borrows in period (price =1)
c2 = m2 - r(c1 - m1) - (c1 - m1)
= m2 + (1 + r)( m1 - c1)
(same as when he saves)
present value of m =
PV = m/(1+r)
consumer earns interests on savings when m1 - c1 is …
positive
consumer earns interests on his borrowings when m1 - c1 is …
negative
polonius point
consumer is neither a borrower or a lender
budget constraint in terms of future value
(1 + r)c1 + c2 = (1 + r)m1 + m2
- p of future consumption = 1
- measures period 1 price relative to period 2 price
budget constraint in terms of present value
c1 + c2/(1 + r) = m1 + m2/(1 + r)
- p of present consumption = 1
- measures period 2 price relative to period 1 price
if indifferent curve has slope = -1, what is the consumer’s taste for consumption ?
indifferent
MRS = -1
indifferent curves for perf complements = consumer consumes …
equal amounts today and tmrow
unwilling to substitute 1 time period for the other
well-behaved prefs : consumer willing to substitute …
some amount of consumption today for consumption tmrow
convexity of prefs says the consumer wld rather have …
an average amount of consumption each period rather than a lot today and nothing tmrow (vice versa)
