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Unformatted text preview: Economics 21 Intermediate Microeconomics Topic 2: Consumer Theory (vii) Application 2: Intertemporal Consumption I. Applications Two key areas: (i) Labour Supply; (ii) Intertemporal Choice. II. Intertemporal Choice Assume individual lives for two periods with a lifetime income endowment of y = ( y 1 , y 2 ) Consumption over time is c = ( c 1 , c 2 ) Now, $ x saved today (i.e. period 1) will yield $(1+ r ) x tomorrow (i.e. period 2) The future value of $ x today is thus $(1+ r ) x II. Intertemporal Choice Conversely, the present value of $ x received tomorrow (i.e. period 2) is: Intuitively, if we receive $ x tomorrow, can borrow $ z today, where: $ 1 1 + $ z 1 + ( 29 = 5 5 = 5 1 1+ II. Intertemporal Choice Thus, given an income endowment of: Then the maximum period 1 income is: And the maximum period 2 income is: ( 29 1 2 , y y y = ( 29 2 2 1 1 y y r y = + + 1 1 2 1 1 y y y r = + + y 2 y 1 Figure 1: Intertemporal Budget Constraint 2 y y 1 y 2 ( 29 1 2 , y y y = 1 y ( 29 2 2 1 1 y y r y = + + 1 1 2 1 1 y y y r = + + II. Intertemporal Choice II....
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This note was uploaded on 07/16/2010 for the course ECON 21 taught by Professor Johng.sessions during the Summer '09 term at Dartmouth.
 Summer '09
 JOHNG.SESSIONS
 Microeconomics

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