Chapter 3 - Alternative to Chapter 3 [See Ch. 4 appendix]...

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Alternative to Chapter 3 [See Ch. 4 appendix] Foundations of Discounting
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Making Consumption Decisions Over Time Individual can spread consumption over time by borrowing and lending (i.e., saving) Frequently consumption > income when young consumption < income when older consumption > income when very old Borrowing and lending is accomplished by using the financial markets Ignoring risk for the moment, let r be the rate at which individuals can borrow or save
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Intertemporal Consumption Opportunity Set $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Consumption today A person with income of $40,000 this year and $60,000 next year who faces a 10% interest rate has the following opportunity set . One choice available is to consume $40,000 now and $60,000 next year. $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Consumption at t+1
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Intertemporal Consumption Opportunity Set $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $0 $20,000 $40,000 $60,000 $80,000 $100,000
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This note was uploaded on 10/17/2011 for the course ECON 101 taught by Professor Thompson during the Spring '11 term at Michigan State University.

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Chapter 3 - Alternative to Chapter 3 [See Ch. 4 appendix]...

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