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Unformatted text preview: Chapter Ten Intertemporal Choice Future Value ◆ Given an interest rate r, the future value of $1 one period from now is ◆ Given an interest rate r, the future value of one period from now $m is FV r = + 1 . FV m r = + ( ). 1 Present Value ◆ Q: How much money would have to be saved now, in the present, to obtain $1 at the start of the next period? ◆ A: $m saved now becomes $m(1+r) at the start of next period, so we want the value of m for which m(1+r) = 1 That is, m = 1/(1+r), the presentvalue of $1 obtained at the start of next period. Present Value ◆ The present value of $1 available at the start of the next period is ◆ And the present value of $m available at the start of the next period is PV r = + 1 1 . PV m r = + 1 . The Intertemporal Choice Problem ◆ Let m 1 and m 2 be incomes received in periods 1 and 2. ◆ Let c 1 and c 2 be consumptions in periods 1 and 2. ◆ Let p 1 and p 2 be the prices of consumption in periods 1 and 2. The Intertemporal Choice Problem ◆ The intertemporal choice problem: Given incomes m 1 and m 2 , and given consumption prices p 1 and p 2 , what is the most preferred intertemporal consumption bundle (c 1 , c 2 )? ◆ For an answer we need to know: – the intertemporal budget constraint – intertemporal consumption preferences. The Intertemporal Budget Constraint ◆ To start, let’s ignore price effects by supposing that p 1 = p 2 = $1. The Intertemporal Budget Constraint c 1 c 2 (c , c ) = (m , m ) is the m 2 m 1 The Intertemporal Budget Constraint...
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This note was uploaded on 09/14/2009 for the course ECON 100A taught by Professor Babcock during the Summer '07 term at UCSB.
 Summer '07
 Babcock

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