Deconstructing an Optimal Intertemporal Choice
An individual has an endowment of $100 for consumption today and $0 for consumption in the future. They have access to two financial tools:
- An investment opportunity that yields a 50% return on any amount invested.
- A loan that can be taken out against future wealth at a 10% interest rate.
Suppose the individual determines their optimal consumption plan is to consume $80 today and $62 in the future. Explain the sequence of financial transactions (involving both investment and borrowing) that allows them to achieve this specific outcome. Show your calculations to demonstrate how this consumption bundle is made possible.
0
1
Tags
CORE Econ
Economics
Social Science
Empirical Science
Science
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
Related
An individual has $100 of income today and no income in the future. They have an opportunity to invest any portion of their current income for a 50% return, which will be paid out in the future. They can also borrow money against their future income at a 10% interest rate. Which of the following statements accurately analyzes this individual's financial situation?
Evaluating an Investment and Borrowing Opportunity
An individual starts with $100 of resources available for consumption today and expects no resources in the future. They have an opportunity to invest any unconsumed portion of their current resources for a 50% return, available in the future period. Additionally, they can borrow against their future resources at an interest rate of 10%. What is the absolute maximum amount of consumption this individual can afford today?
Evaluating Financial Options
An individual starts with $100 of resources for today and expects no resources in the future. They have two financial options: 1) They can invest any portion of their current resources for a 50% return, which will be available in the future. 2) They can borrow against their future wealth at a 10% interest rate. Given these options, the opportunity cost of one unit of consumption today is the same whether the individual is a net saver or a net borrower.
Calculating Intertemporal Consumption
An individual starts with $100 today and no income in the future. They can invest their current resources for a 50% return, which will be available in the future period. They can also borrow against their future wealth at a 10% interest rate. Match each concept below with its correct numerical value or interpretation in this scenario.
Deconstructing an Optimal Intertemporal Choice
An individual starts with $100 for consumption today and expects no income in the future. They have two financial options: they can invest any unconsumed portion of their current funds for a 50% return, or they can borrow against their future wealth at a 10% interest rate.
Suppose this person is currently planning to consume $60 today and invest the remaining $40. At this specific consumption level, their personal valuation is such that they are willing to give up exactly $1.30 of future consumption to gain an additional $1.00 of consumption today.
Which of the following statements provides the correct analysis of their plan?
An individual has an endowment of $100 for today and expects no income in the future. They have two financial options: they can invest any unconsumed portion of their current funds for a 50% return, or they can borrow against their future wealth at a 10% interest rate. Suppose this individual is currently at a point where their personal willingness to trade future consumption for an additional unit of present consumption is 1.2 (i.e., they are willing to give up $1.20 in the future for $1.00 today). To improve their overall satisfaction, what action should they take?