1. L10
Intertemporal Choice

2. 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)

3. 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

4. Intertemporal Budget Constraint

5. Intertemporal Budget Constraint

6. Translation:

7. 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

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

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

10. Preferences
Discount rate
Discount factor

11. Choice

12. Magic Formulas

13. Borrower, Lender? Savings

14. Borrower, Lender? Savings

15. Consumption Smoothing
Life Cycle

16. Consumption Tilting