Ch10_class_09(2)

# Ch10_class_09(2) - Chapter Ten Intertemporal Choice Future Value ◆ Given an interest rate r the future value of \$1 one period from now is ◆

This preview shows pages 1–9. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

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 present-value 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...
View Full Document

## This note was uploaded on 09/14/2009 for the course ECON 100A taught by Professor Babcock during the Summer '07 term at UCSB.

### Page1 / 27

Ch10_class_09(2) - Chapter Ten Intertemporal Choice Future Value ◆ Given an interest rate r the future value of \$1 one period from now is ◆

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online