1. Buying and Selling: Applications

2. Review Model of choice We know preferences and we find
The two differences – net demands
Buying, selling?

3. More generally x2 w2 w1 x1

4. Three Applications 1. Labor Supply (Labor-Leisure Choice)
2. Intertemporal Choice
(Consumption-Savings Choice)
3. Uncertainty (Insurance)
(Consumption across states of the world)

5. Intertemporal Choice Two periods: Today and Tomorrow
Goods: consumtion today and tomorrow
Endowment: income today and income tomorrow
Possibility of borrowing and lending

6. Intertemporal Choice

7. Intertemporal Budget Constraint

8. Present Value (PV) and Future Value (FV)
The interest rate is
FV: Future equivalent of today’s $1
PV: Today’s equivalent of tomorrows $1
What is PV and FV of cashflow

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

10. Comparing two cashflows

11. Intertermporal Choice
Discount rate
Discount factor
Magic formulas

12. Borrower, Lender? Savings

13. Borrower, Lender? Savings

14. Consumption Smoothing

15. Consumption Tilting