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lecture08 - Economics 1011a Intermediate Microeconomics...

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Economics 1011a: Intermediate Microeconomics Lecture 8: Consumption Over Time Thursday, October 9, 2008 1011a – Lecture 8 1
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1011a – Lecture 8 2 Consumption in 2 Periods For today we will think of this as a problem in two periods: consumption today and consumption tomorrow. We think of these as two goods , c 1 and c 2 . So utility is given in general by
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1011a – Lecture 8 3 No Specific Goods Notice that we are abstracting from the specific consumption decisions in each period. Is this reasonable?
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1011a – Lecture 8 4 Separable Consumption The standard form we use for consumption over two periods is: β is called the discount factor. What would you expect the value of β to be? What do we lose by assuming separability?
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1011a – Lecture 8 5 The Budget Constraint In a general two period model, consumers receive income in period 1 and in period 2. We denote these two incomes by y 1 and y 2 . However, this does not mean that you must consume y 1 in period 1 and y 2 in period 2.
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1011a – Lecture 8 6 Borrowing and Lending We assume that consumers can borrow and lend across periods at a gross interest rate of 1+ r. The rate for borrowing is the same as the rate for lending. There are no credit constraints. Borrowing and lending must balance out at the end of the second period.
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1011a – Lecture 8 7 The Budget Constraint (I) The loan market establishes an exchange rate between periods 1 and 2.
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