Reading 34 - Economics & Investment Markets

Question 1

How do you calculate the intertemporal rate of subsititution?

Answer 1

marginal utility of consuming 1 unit in the future divided by the marginal utility of current consumption of 1 unit

Question 2

What does the intertemporal rate of substitution (IRS) measure?

Answer 2

The IRS measures the rate at which a consumer is willing to substitute consumption in one period for consumption in another period.

Question 3

True or False: A higher intertemporal rate of substitution indicates a greater preference for present consumption over future consumption.

Answer 3

True

Question 4

Which of the following statements is true regarding the intertemporal rate of substitution? A) It is constant over time B) It changes based on consumer preferences C) It only applies to savings decisions

Answer 4

B) It changes based on consumer preferences

Question 5

What is the relationship between the intertemporal rate of substitution and the discount rate?

Answer 5

The intertemporal rate of substitution is inversely related to the discount rate; as the discount rate increases, the IRS typically decreases.