# lecture10 - Lecture 10 CHAPTER 16 Consumption slide 1...

This preview shows pages 1–10. Sign up to view the full content.

CHAPTER 16 CHAPTER 16 Consumption Consumption slide 1 Lecture 10 Lecture 10

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

View Full Document
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 2 Chapter overview Chapter overview This chapter surveys the most prominent work  on consumption: Irving Fisher and Intertemporal Choice Franco Modigliani:  the Life-Cycle Hypothesis Milton Friedman:  the Permanent Income  Hypothesis Robert Hall:  the Random-Walk Hypothesis David Laibson:  the pull of instant gratification
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 3 Irving Fisher and Intertemporal Choice Irving Fisher and Intertemporal Choice The basis for much subsequent work on  consumption.  Assumes consumer is forward-looking and  chooses consumption for the present and  future to maximize lifetime satisfaction. Consumer’s choices are subject to an  intertemporal budget constraint a measure of the total resources available  for present and future consumption

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

View Full Document
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 4 The basic two-period model The basic two-period model Period 1:  the present Period 2:  the future Notation Y 1  is income in period 1 Y 2  is income in period 2 C 1  is consumption in period 1 C 2  is consumption in period 2 S  =  Y 1   -   C 1  is saving in period 1 ( S  < 0 if the consumer borrows in period  1)
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 5 Deriving the Deriving the intertemporal budget constraint intertemporal budget constraint Period 2 budget constraint: 2 2 (1 ) C Y r S = + + 2 1 1 (1 ) ( ) Y r Y C = + + - Rearrange to put  C   terms on one side  and  Y   terms on the other: 1 2 2 1 (1 ) (1 ) r C C Y r Y + + = + + Finally, divide through by (1+ r   ):

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

View Full Document
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 6 The intertemporal budget constraint The intertemporal budget constraint 2 2 1 1 1 1 C Y C Y r r + = + + + present value of  lifetime consumption present value of  lifetime income
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 7 The budget  constraint  shows all  combinations  of  C 1  and  C 2   that just  exhaust the  consumer’s  resources. The intertemporal budget constraint The intertemporal budget constraint C 1 C 2 Y 1 Y 2 Borrowing Saving Consump =  income in  both periods

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

View Full Document
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 8 An  indifference  indifference  curve curve  shows all  combinations of  C 1  and  C 2  that  make the  consumer  equally happy. Consumer preferences Consumer preferences C 1 C 2 IC 1 IC 2 Higher  indifference  curves  represent  higher levels  of happiness.
CHAPTER 16 CHAPTER 16 Consumption Consumption slide 9 Marginal rate of  Marginal rate of  substitution substitution  ( MRS   ):   the amount of  C 2   consumer would be  willing to substitute  for one unit of

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.

{[ snackBarMessage ]}

### Page1 / 39

lecture10 - Lecture 10 CHAPTER 16 Consumption slide 1...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online