Abby's friend tells her that the latest Harry Potter movie is good. Abby is trying to decide between reading the
book and watching the movie. Assume that the movie yields an immediate utility of 5 in the single period (single day) during which Abby watches it, and a utility of 0 thereafter.Assume that the book yields a utility of 0.2 for each of 100 periods during which she reads it, and a utility of 0 thereafter. Adwoa's utility function at time t is U(t) =u(ct) + β *∑i=t+1∞ u(ci)δ i. Assume β = 0.3 and δ = 0.8. How do you calculate the present value of:
- seeing the movie today
- reading the book today
What should she choose?
How do you calculate the same for tomorrow, i.e., one period later?
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