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Buying and Selling: Applications

L9. Buying and Selling: Applications. Review. Model of choice We know preferences and we find The two differences – net demands Buying, selling?. More generally. x 2. w 2. w 1. x 1. Three Applications. 1. Labor Supply (Labor-Leisure Choice)

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Buying and Selling: Applications

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  1. L9 Buying and Selling: Applications

  2. Review • Model of choice • We know preferences and we find • The two differences – net demands • Buying, selling?

  3. More generally x2 w2 w1 x1

  4. Three Applications 1. Labor Supply (Labor-Leisure Choice) 2. Intertemporal Choice (Consumption-Savings Choice) 3. Uncertainty (Insurance) (Consumption across states of the world)

  5. Intertemporal Choice • Two periods: Today and Tomorrow • Goods: consumtion today and tomorrow • Endowment: income today and income tomorrow • Possibility of borrowing and lending

  6. Intertemporal Choice

  7. Intertemporal Budget Constraint

  8. Present Value (PV) and Future Value (FV) • The interest rate is • FV: Future equivalent of today’s $1 • PV: Today’s equivalent of tomorrows $1 • What is PV and FV of cashflow

  9. Budget constraint (2 versions) • FV of spending = FV of income • PV of spending = PV of income • Prices and income

  10. Comparing two cashflows

  11. Intertermporal Choice • Discount rate • Discount factor • Magic formulas

  12. Borrower, Lender? Savings

  13. Borrower, Lender? Savings

  14. Consumption Smoothing

  15. Consumption Tilting

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