Consumption -Applications Intertemporal Preferences The case of perfect substitutes represents someone who doesn't care whether the today or tomorrow The case of perfect complements represents someone who wants to consume exactly the same amount on each da equal amounts of consumption on each day) are preferred to extremes(a more unequal split over the two days) Consumption-Applicatiorsa Intertemporal Choice Optimal choice takes place as before. The consumer is either a lender or a borrower Ca c2 The first graph shows the case of a lender, the second a borrower. The first agent consumes less than they start with today and more tomorrow, the second agent consumes more than they start with today and less tomorrow Notice how this corresponds with net buyers and sellers when discussing endowments in earlier examples. If the consumer is a lender and r rises they are better off and they continue to be a lender. If the consumer is a borrower and r rises, they need not continue to be a borrower- but if they do they are worse off.Consumption — Applications 9 Intertemporal Preferences • The case of perfect substitutes represents someone who doesn’t care whether they consume today or tomorrow. • The case of perfect complements represents someone who wants to consume exactly the same amount on each day. • Concavity is quite appropriate — the consumer wishes to split consumption over the two days. Averages (more equal amounts of consumption on each day) are preferred to extremes (a more unequal split over the two days). . ................................................................................ . .................................................................................................... ................................................................................................................................................................................................................................................................................ . ........ ........ ..... 0 c2 c1 Consumption — Applications 10 Intertemporal Choice • Optimal choice takes place as before. The consumer is either a lender or a borrower. . ................................................................................................ . ................................................................................................ ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. 0 0 • • • • c2 c1 c2 c1 m2 m1 m2 c m1 ∗ 1 c ∗ 2 c ∗ 1 c ∗ 2 . . . . . ......... ............. ............. ............. .............. ......... ............. ............. ............. ............. . . . . . . . . . . . ............. ............. ..... . . . ............. ............. ............. ............. ............. ............. ............. • The first graph shows the case of a lender, the second a borrower. The first agent consumes less than they start with today and more tomorrow, the second agent consumes more than they start with today and less tomorrow. • Notice how this corresponds with net buyers and sellers when discussing endowments in earlier examples. • If the consumer is a lender and r rises they are better off and they continue to be a lender. If the consumer is a borrower and r rises, they need not continue to be a borrower — but if they do they are worse off