Chapter5 - Chapter 5 Intertemporal Consumption-Leisure...

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© Sanjay K. Chugh 71 Spring 2008 Chapter 5 Intertemporal Consumption-Leisure Model We have now studied the consumption-leisure model as a “one-shot” model in which individuals had no regard for the future: they simply worked to earn income, all of which they then spent on consumption right away, socking away none of it for the future. Individuals do, of course, consider their future prospects when making economic decisions about the present. We saw this idea in our study of the two-period consumption-savings model. It should not strike you as unusual, then, that when an individual makes his optimal choice about consumption and leisure in the current period, he recognizes that he will make a similar consumption-leisure choice in the future. In effect, then, it seems there are multiple consumption-leisure choices an individual makes over the course of his lifetime. However, these choices are not independent of each other because consumers can save for the future or borrow against future income. In this section we will bring the consumption-leisure model together with the consumption-savings model. As we will see, doing so in effect is just “gluing” the two models together. The main benefit is that it allows consideration of a broader range of consequences of macroeconomic policies – in particular it allows us to see that economic policies have their consequences not just in the time period in which they are implemented but also other periods. Individual’s Preferences With two periods, in each of which the individual makes a consumption-leisure choice, there are four objects which determine the individual’s lifetime utility: consumption in period 1, leisure in period 1, consumption in period 2, and leisure in period 2.
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This note was uploaded on 02/08/2011 for the course ECON 101 taught by Professor Gilbert during the Spring '11 term at Bryan College.

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Chapter5 - Chapter 5 Intertemporal Consumption-Leisure...

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