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Unformatted text preview: In Microeconomics we look at consumption choice, subject to a budget constraint. Consider consumption at different dates to be different goods. P1yi+p2y2+….pnyn=I EX: Let’s look at a consumer who lives, earns, and consumes for 2 periods. Can save and borrow at interest rate r. In period 1 s= y1 - c1 +s=savings -s=borrowing In period 2 c2= y2 + s(1+r) c2=y2 + (y1-c1) (1+r) C1(1+r) + c2 = y2(1+r) +y2 Divide both sides by 1+r C1 + c2/1+r = y1 + y2/1+r This is the intertemporal budget constraint Earlier consumption has a higher importance than later consumption because it loses the ability to gain interest When you save, you trade todays consumption for tomorrows consumption POV Is the maximum amount of expenditure that can be formed from a sequence of payments. Ex: Is $700 today better than $1000 in 5 years. 1000 = c(1+r) = c= 1000/(1+r)5...
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This note was uploaded on 04/18/2011 for the course ECON 302 taught by Professor Staff during the Fall '08 term at UVA.
- Fall '08