chapter 8: intertemporal choice

Question 1

The budget constraint

Answer 1

We consider a consumer who chooses how much to consume of some good (composite good) in each of two time periods.

We can express the budget constraint in terms of future value or in present value

Question 2

The present-value form is

Answer 2

the more important way to express the intertemporal budget constraint because it measures the future relative to the present.

Question 3

Present value

Answer 3

The present value measures everything in today’s euros.

Question 4

A consumption plan is affordable if

Answer 4

the present value of consumption equals the
present value of income.

Question 5

A consumption plan is affordable if

Answer 5

the present value of consumption equals the
present value of income.

Question 6

If a consumer can freely borrow and lend at a constant interest rate, then

Answer 6

the consumer would always prefer a pattern of income with a higher present value
than a pattern with a lower present value

Question 7

If you want to compare two different investments that yield different streams of
payments, NPV:

Answer 7

you simply compute the two present values and choose the largest one.

The investment should be purchased if the net present value is positive.