Total Consumption (Income) in Period 2 W Total Consumption (Income) in Period 2 Y2 = Y*2a la = l*a 45° O Y1 = Y*1a W Figure 7.1a. Neutral time preference. Total Consumption (Income) in Period 1 W Total Consumption (Income) in Period 2 Y2 Y*2b l*b lb 45° O Y1 Y*1b W Figure 7.1b. Positive time preference. Total Consumption (Income) in Period 1 W Total Consumption (Income) in Period 2 Y*2c Y2 l*c lc 45° O Y*1c Y1 W Figure 7.1c. Negative time preference. Total Consumption (Income) in Period 1 Figure 7.1. Neutral, positive, and negative time prefeeences.

3 W (1 + r) 2 Y2 + Y1 (1 + r) W 1 Total consumption (income) in Period 2 Y*2’’’ Y*2’’ l*a’’’ Y2 = Y*2’ l*a’’ la = l*a’ 45° 45° Y*1’’ Y1 Y*1’’’ = Y*1’ Y1 + Y2 W Total consumption (income) in Period 1 Figure 7.2a. Intertemporal consumption decisions for a consumer with neutral time preference.

W (1 + r) Y2 + Y1 (1 + r) W Total Consumption (Income) in Period 2 Y2 Y*2’’’ Y*2’ Y*2’’ l*b’’’ l*b’ l*b’’ lb 45° 45° O W Y1 Y*1’’ Y*1’’’ Y1 + Y2 Y*1’ Total Consumption (Income) in Period 1 Figure 7.2b. Intertemporal consumption decisions for a consumer with positive time preference.

Slope = - (1 + r) P2 Yi2 Total Consumption (Income) in Period 2 Y2 Y*2 Y2 l* l l 45° O Yi1 Y1 Y1 Y*1 P1 Total Consumption (Income) in Period 1 Figure 7.3. Investment and borrowing: The intertemporal decision of an individual with productive and market opportunities.

Current price of next-period consumption SP1 S1 Current price of next-period consumption P*Y1 = 1/(1 + r*) YP1 Y1 Y*1 Next-period consumption Figure 7.4a. Demand for next-period consumption, Y1, and supply from endowments and productive opportunities. D0 SP0 S0 Next-period price of current consumption P*Y0 = 1 + r* YP0 Y*0 Y0 Current Consumption Figure 7.4b. Demand and supply of funds for current consumption. Figure 7.4. Market equilibrium in the two-period model.

current-period consumption Consumption, saving, and investment Opportunity cost of current-period consumption Dl0 SD0 SS0 P*Y0 = 1 + r* Yl0 =Y Y0 Consumption, saving, and investment Figure 7.5a. Demand and supply of investment funds in a two-period model. Df = MEI SS = RTP Interest rate r* I, S Saving, investment Figure 7.5b. Saving, investment, and the interest rate in a perpetuity model. Figure 7.5. Equilibrium saving, investment, and interest rate.