Chapter Ten Intertemporal choice
Chapter Ten Intertemporal Choice
What are We doing in this chapter? We apply our basic framework of consumer choice to study issues of choices across different time periods, Again, in terms of theoretical framework. not much is new!
What Are We Doing in this Chapter? We apply our basic framework of consumer choice to study issues of choices across different time periods; Again, in terms of theoretical framework, not much is new!
What Are the questions? Persons often receive income in “umps”;eg. monthly salary How is a lump of income spread over the following month(saving now for consumption later)? Or how is consumption financed by borrowing now against income to be received at the end of the month?
What Are the Questions? Persons often receive income in “lumps”; e.g. monthly salary. How is a lump of income spread over the following month (saving now for consumption later)? Or how is consumption financed by borrowing now against income to be received at the end of the month?
Present and Future values Begin with some simple financial arithmetic Take just two periods; 1 and 2 Let r denote the interest rate per period
Present and Future Values Begin with some simple financial arithmetic. Take just two periods; 1 and 2. Let r denote the interest rate per period
Future value Given an interest rate r the future value one period from now of m is FV=m(1+r)
Future Value Given an interest rate r the future value one period from now of $m is FV = m(1+ r)
Present value Q: How much money would have to be saved now, in the present, to obtain $1 at the start of the next period? A: Sm saved now becomes $m(1+r)at the start of next period, so we want the value of m for which m(1+r)=1 That is, m=1/(1+r), the present-value of $1 obtained at the start of next period
Present Value Q: How much money would have to be saved now, in the present, to obtain $1 at the start of the next period? A: $m saved now becomes $m(1+r) at the start of next period, so we want the value of m for which m(1+r) = 1 That is, m = 1/(1+r), the present-value of $1 obtained at the start of next period
Present value The present value of $1 available at the start of the next period is PV 1+r And the present value of $m available at the start of the next period is PV= 1+r
Present Value The present value of $1 available at the start of the next period is And the present value of $m available at the start of the next period is PV r = + 1 1 . PV m r = 1+
The Intertemporal Choice Problem Let m and ma be incomes received in periods 1 and 2. Let C, and c2 be consumptions in periods 1 and 2. Let p, and p2 be the prices of consumption in periods 1 and 2
The Intertemporal Choice Problem Let m1 and m2 be incomes received in periods 1 and 2. Let c1 and c2 be consumptions in periods 1 and 2. Let p1 and p2 be the prices of consumption in periods 1 and 2
The Intertemporal choice Problem The intertemporal choice problem Given incomes m, and m2, and given consumption prices p, and p2, what is the most preferred intertemporal consumption bundle(c1, C2)? For an answer we need to know: the intertemporal budget constraint intertemporal consumption preferences
The Intertemporal Choice Problem The intertemporal choice problem: Given incomes m1 and m2 , and given consumption prices p1 and p2 , what is the most preferred intertemporal consumption bundle (c1 , c2 )? For an answer we need to know: – the intertemporal budget constraint – intertemporal consumption preferences
The Intertemporal budget Constraint To start, let's ignore price effects by supposing that p1=p2=$1
The Intertemporal Budget Constraint To start, let’s ignore price effects by supposing that p1 = p2 = $1
