Ch 6 Intertemporal Consumption

Ch 6 Intertemporal Consumption

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Unformatted text preview: corn the agent could consume at result: in the present the most you can consume is the Notice that this is the of your lifetime income). then this is the of real lifetime income (a nice The y-axis intercept is ( ) if the agents spends her entire lifetime income on consumption at then this is the maximum amount of corn the agent could consume at Notice that this is the of real lifetime income (a nice result: in the future the most you can consume is the of your lifetime income). ) This means that in real terms, if you wanted to The slope of the real inter-temporal budget constraint is ( have another unit of corn today (at ) then to stay within your budget constraint you’d have to give up ( ) units of tomorrow (at ). We can also interpret the slope in terms of the “real price” consumption today vs. tomorrow. To see this, first recall from consumer theory that the slope of the budget line was That is, we can interpret the numerator of the budget line slope as the “price of good 1” and interpret the denominator of the budget line slope as the “price of good 2”. With this interpretation we can express the slope of the real inter-temporal budget constraint as: ( ) According to this interpretation, the real price of a unit of corn at is 1 and since this is the real price of corn in the future, and being equal to 1, it must be the real price of a unit of corn at . That is: If we are measuring real prices from a “future” perspective then it must be that: Thus, we can interpret the slope of the real inter-temporal budget constraint as: This makes sense: in the future, the “banked” it, then you would get ( real price of a unit of corn is 1 and if you had a unit of corn at ) units of corn in the future. and you We’ll have a different interpretation of the slope if we re-arranged the slope expression as: ( ) 10 ECO 204 Chapter 6: Inter-temporal Consumption (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. According to this interpretation, the real price of a unit of corn at is and since this is the real price of corn in the present, and being equal to 1, it must be the real price of a unit of corn at . That is: If we are measuring real prices from a “present” perspective then it must be that: Thus, we can interpret the slope of the real inter-temporal budget constraint as: This makes sense: in the present, the “bank” real price of a unit of corn is 1 and to get a unit of corn at you’d have to units of corn in the present. Now, recall that the agent is endowed with units of corn at and are in units of corn, we can plot the incomes as the “endowment” point units of corn at . Since these “incomes” ( ) in the corn consumption set below: “Endowment Point” How do we know budget line passes through “E”? E ( ) ( ) Notice that the real inter-temporal budget line passes through the endowment point. We can confirm this by substituting and in the real inter-temporal budg...
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This note was uploaded on 03/20/2014 for the course ECON 204 taught by Professor Ajazhussain during the Fall '09 term at University of Toronto- Toronto.

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