L10 Intertemporal Choice

Three Applications Abstract Model (apples and oranges) Applications: 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty (Insurance) (Consumption across states of the world)

Intertemporal Choice Two periods: Today and Tomorrow Goods: consumtion today and tomorrow Endowment: income today and income tomorrow Possibility of borrowing and lending New: Savings ,PV and FV

Intertemporal Budget Constraint

Intertemporal Budget Constraint

Translation:

Present Value (PV) and Future Value (FV) FV: Future equivalent of today’s $1 PV: Today’s equivalent of tomorrows $1 What is PV and FV of cash flow Example

Budget constraint (2 versions) FV of spending = FV of income PV of spending = PV of income Prices and income

Quiz is a market price of: in terms of None of the above

Preferences Discount rate Discount factor

Choice

Magic Formulas

Borrower, Lender? Savings

Borrower, Lender? Savings

Consumption Smoothing Life Cycle

Consumption Tilting