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Lecture 10 - Economics 101A(Lecture 10 Stefano DellaVigna...

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Economics 101A (Lecture 10) Stefano DellaVigna September 29, 2009
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Outline 1. Application 2: Intertemporal choice 2. Application 3: Altruism and charitable donations
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1 Intertemporal choice Nicholson Ch. 17, pp. 597-601 (502—506, 9th) So far, we assumed people live for one period only Now assume that people live for two periods: t = 0 — people are young t = 1 — people are old t = 0 : income M 0 , consumption c 0 at price p 0 = 1 t = 1 : income M 1 > M 0 , consumption c 1 at price p 1 = 1 Credit market available: can lend or borrow at inter- est rate r
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Budget constraint in period 1? Sources of income: M 1 ( M 0 c 0 ) (1 + r ) (this can be negative) Budget constraint: c 1 M 1 + ( M 0 c 0 ) (1 + r ) or c 0 + 1 1 + r c 1 M 0 + 1 1 + r M 1
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Utility function? Assume u ( c 0 , c 1 ) = U ( c 0 ) + 1 1 + δ U ( c 1 ) U 0 > 0 , U 00 < 0 δ is the discount rate Higher δ means higher impatience Elicitation of δ through hypothetical questions Person is indi ff erent between 1 hour of TV today and 1 + δ hours of TV next period
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Maximization problem: max U ( c 0 ) + 1 1 +
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